PROVIDENT COMPANIES INC /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

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For the fiscal year ended December Commission file number 1-11834
31, 1998

Provident Companies, Inc.
(Exact name of registrant as specified in its charter)

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DELAWARE 62-1598430
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1 FOUNTAIN SQUARE
CHATTANOOGA, TENNESSEE 37402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (423) 755-1011

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Securities registered pursuant to Section 12(b) of the Act:

COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)

Securities registered pursuant to Section 12(g) of the Act: None

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

As of March 1, 1999, there were 135,585,015 shares of the registrant's
common stock outstanding. The aggregate market value of the shares of common
stock, based on the closing price of those shares on the New York Stock
Exchange, Inc., held by non-affiliates was approximately $2,594,751,210.

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

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PART 1

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking statements with respect to
the financial condition, results of operations and business of Provident
Companies, Inc. (the "Company"). These statements may be made directly in this
document referring to the Company or may be made part of this document by
reference to other documents filed with the Securities and Exchange Commission
by the Company, which is known as "incorporation by reference," and may
include statements for the period following the completion of the proposed
merger with UNUM Corporation ("UNUM"). You can find many of these statements
by looking for words such as "believes," "expects," "anticipates," "estimates"
or similar expressions in this document or in documents incorporated herein.

These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors that may cause actual results to differ from those
contemplated by the forward-looking statements include, among others, the
following possibilities:

. Competitive pressures in the insurance industry may increase
significantly through industry consolidation, competitor demutualization,
or otherwise.

. General economic or business conditions, both domestic and foreign, may
be less favorable than expected, resulting in, among other things, lower
than expected revenues, and the Company could experience higher than
expected claims or claims with longer duration than expected.

. Insurance reserve liabilities can fluctuate as a result of changes in
numerous factors, and such fluctuations can have material positive or
negative effects on net income.

. Costs or difficulties related to the integration of the business of the
Company and UNUM may be greater than expected.

. Legislative or regulatory changes may adversely affect the businesses in
which the Company is engaged.

. Necessary technological changes, including changes to address "year 2000"
data issues, may be more difficult or expensive to make than anticipated,
and year 2000 issues at other companies may adversely affect operations.

. Adverse changes may occur in the securities market.

. Changes in the interest rate environment may adversely affect profit
margins.

. The rate of customer bankruptcies may increase.

All subsequent written and oral forward-looking statements attributable to
the Company or any person acting on its behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section. The Company does not undertake any obligation to release publicly any
revisions to such forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the occurrence of
unanticipated events. See "Risk Factors" herein.

Item 1. Business

General

The Company, a Delaware business corporation, is the parent holding company
for a group of insurance companies that collectively operate in all 50 states,
the District of Columbia, Puerto Rico, and Canada. The Company's two principal
operating subsidiaries are Provident Life and Accident Insurance Company
("Accident") and The Paul Revere Life Insurance Company ("Paul Revere Life").
The Company, through its subsidiaries, is the largest provider of individual
disability insurance and the second largest overall disability insurer in
North America on the basis of in-force premiums. It also provides a
complementary portfolio of life insurance products, including life insurance,
employer- and employee-paid group benefits, and related services.

2

Since 1994, the Company has completed a comprehensive corporate
repositioning that has prepared it to support growth and increase stockholder
value. A new management team headed by J. Harold Chandler, who joined the
Company in November 1993, initiated a strategic review of the business. As a
result of its review, management refocused the Company's strategy to (i) serve
the individual and employee benefits insurance markets, (ii) leverage the
Company's disability insurance expertise, (iii) utilize multiple distribution
channels to reach broader market segments, and (iv) more closely align the
interests of the Company's employees with those of its stockholders.

The Company has successfully undertaken a number of major initiatives in
pursuing this strategy. Specifically, the Company (i) sold its group medical
business for $231.0 million in cash and stock, (ii) began winding down its
guaranteed investment contracts ("GICs") business which carried high capital
requirements, (iii) reduced the annual dividend on the common stock from $0.52
to $0.40 per share on a split-adjusted basis to preserve capital to fund
future growth, (iv) simplified the corporate legal structure and eliminated a
dual class of common stock that had special voting rights in order to present
a more conventional corporate structure profile to the investing market, (v)
sold in six transactions $1,459.6 million in commercial mortgage loans as part
of repositioning its investment portfolio, (vi) restructured its marketing and
distribution channels, along with the support areas of product development,
underwriting, and claims, to better reach and serve individual and employee
benefits customers, (vii) strengthened its claims management procedures in the
disability income insurance business, on which the Company took a $423.0
million pre-tax charge in the third quarter of 1993 to strengthen reserves on
a portion of that block of business, and (viii) began restructuring its
disability income products to discontinue over a reasonable period the sale of
policies which combined noncancelable contracts with long-term own-occupation
provisions and to offer in their place an income replacement contract with
more reasonable limits and better pricing for elective provisions.

In furtherance of its strategic plan, the Company acquired The Paul Revere
Corporation ("Paul Revere") and GENEX Services, Inc. ("GENEX") in early 1997
and disposed of certain non-core lines of business. These actions strengthen
the Company's disability insurance capabilities and enable the Company to
offer a comprehensive and well-focused portfolio of products and services to
its customers. Paul Revere is a specialist in disability insurance, with
$1,030.0 million of disability premium income (91 percent of its total premium
income) in 1998. From 1989 through 1997 it was the largest provider of
individual disability insurance in the United States and Canada on the basis
of in-force premiums. By combining Paul Revere's operations with those of the
Company, the Company has begun to realize significant operating efficiencies,
including leveraging both companies' knowledge of disability risks,
specialized claims and underwriting skills, and sales expertise. The Company
also has realized cost savings as a result of combining the corporate,
administrative, and financial operations of the two companies.

GENEX provides the Company with specialized skills in disability case
management and vocational rehabilitation that advance the Company's goal of
providing products that enable disabled policyholders to return to work. GENEX
provides a full range of disability management services, including work site
injury management, telephonic early intervention services for injured workers,
medical case management, vocational rehabilitation, and disability cost
analysis, to third party administrators, corporate clients, and insurance
companies. It employs over 1,400 people, including 556 medical and vocational
rehabilitation experts, in 120 offices in the United States and Canada. In
addition to its historical focus on the worker's compensation market, GENEX
and the Company are now working together to offer customized disability
programs for the employee benefits market that are intended to integrate and
simplify coverages, control costs, and improve efficiency for employers with
significant disability and related claims. The Company also expects GENEX to
play an increasingly significant role in helping the Company to manage its own
exposure to individual and group disability claims.

As it continues to assess acquisition opportunities that could complement
its core business, the Company has also continued to assess and exit non-core
lines. In 1997, the Company transferred its dental business to Ameritas Life
Insurance Corp. The dental block, which was acquired in the Paul Revere
acquisition, produced $39.2 million in premium income in 1997 and $48.3
million in 1996.

3

Effective January 1, 1998, the Company entered into an agreement with
Connecticut General Life Insurance Company ("Connecticut General") for
Connecticut General to reinsure, on a 100% coinsurance basis, the Company's
in-force medical stop-loss insurance coverages sold to clients of CIGNA
Healthcare and its affiliates ("CIGNA"). This reinsured block constitutes
substantially all of the Company's medical stop-loss insurance business. The
small portion remaining consists of medical stop-loss coverages sold to
clients other than those of CIGNA. These coverages will not be renewed.

Effective April 30, 1998, the Company closed the sale of its individual and
tax-sheltered annuity business to American General Annuity Insurance Company
and The Variable Annuity Life Insurance Company, affiliates of American
General Corporation ("American General"). The in-force business sold consisted
primarily of individual fixed annuities and tax-sheltered annuities in
Accident, Provident National Assurance Company ("National"), Paul Revere Life,
The Paul Revere Protective Life Insurance Company ("Paul Revere Protective"),
and The Paul Revere Variable Annuity Insurance Company ("Paul Revere
Variable"). American General also acquired a number of miscellaneous group
pension lines of business sold in the 1970s and 1980s which are no longer
actively marketed. Pursuant to an administrative services agreement, an
affiliate of American General is providing administrative services to
registered separate accounts of Paul Revere Variable and National. The sale
did not include the Company's block of GICs or group single premium annuities
("SPAs"), which will continue in a run-off mode. In consideration for the
transfer of the approximately $2.4 billion of statutory reserves, American
General paid the Company a ceding commission of approximately $58.0 million.

On July 15, 1997, the Board of Directors authorized the Company to
repurchase up to 1,000,000 shares (2,000,000 shares following a subsequent
stock split) of its common stock. In May 1998, the Company purchased 200,000
shares of common stock under this repurchase program for a total price of $7.7
million at an average price of $38.43 per share. The Company discontinued this
program in anticipation of the proposed merger with UNUM as discussed below.

In the most recent accomplishment under its strategic plan, on November 23,
1998, the Company announced that it had entered into an Agreement and Plan of
Merger with UNUM pursuant to which the Company and UNUM would merge under the
name of UNUMProvident Corporation. UNUM, through it subsidiaries, is a leading
provider in the United States and the United Kingdom of group long-term and
short-term disability insurance policies and individual disability insurance
policies, as well as a major provider of other insurance products, including
life insurance offered through groups, long-term care policies, and employee-
paid insurance products offered to employees at their work site.

Under the terms of the Agreement, Company stockholders will receive 0.73 of
a share of UNUMProvident common stock for each share of the Company's stock
that they hold. UNUM stockholders will receive one share of UNUMProvident
common stock for each share of UNUM common stock they hold. The merger is
subject to approval or clearance by certain federal and state regulators,
approval by stockholders of both companies, and customary closing conditions.
The transaction is expected to be completed by mid-1999.

Business Strategies

The Company's objective is to grow its business and improve its
profitability by continuing to follow the strategies set forth below.

Serve the Individual and Employee Benefits Markets. The Company believes
that the broad individual and employee benefits insurance markets are
attractive for a company with its specialty focus on disability insurance.
First, the Company believes disability insurers have not traditionally served
the broad market's potential demand for protection against loss of income due
to disability, as evidenced by the industry's size. As of December 31, 1998,
the total in-force premium from disability products is approximately $9
billion, compared to $197 billion for annuities and $115 billion for life
insurance. The Company believes that if it is responsive to the needs of its
markets, there is opportunity for growth in the disability industry.

4

Second, individual disability insurance has traditionally been sold
primarily in the medical and physician markets, where market penetration has
been significant. The Company believes that expanding its marketing to other
market segments offers greater opportunities for growth. The penetration of
the attorney, executive, and professional markets, for example, is far less
than that of the medical and physician markets. The market of middle managers
and front-line workers has not been significantly developed by individual
disability insurers. Each of these markets is significantly larger than the
medical and physician market. The Company's strategy is to design products and
services that meet the needs of these underpenetrated market segments,
offering them both individual disability insurance and related life insurance,
as well as other products.

Third, the Company believes that the markets for group disability insurance
are also underpenetrated. The Company is focused on creating customized
solutions for employee benefits customers that include group disability
insurance and related employee- and employer-paid benefits as well as
disability management services. The employee benefits market is undergoing a
change as employers seek to simplify coverages, control costs, and improve
efficiency. The Company has positioned itself to package its products and
services to meet this growing demand for managed disability programs and 24-
hour coverage.

The Company encourages its sales representatives and producers to respond to
the needs of customers by cross-selling complementary products to each
account. In the past several years, for example, the Company has made ease of
meeting customers' needs the priority for its information systems investments.
The Company now offers combined proposals that include pre-approved life
insurance with individual disability policies and bill a range of voluntary
product offerings through a single payroll deduction entry on an employee's
paycheck. The Company also has employee and producer compensation plans that
reward the sale of several of the Company's products rather than single
product sales, including grants of stock options to selected producers and a
multi-line producer compensation plan designed to leverage a producer's
production and overall compensation.

Leverage Disability Insurance Expertise and Risk Management Skills. In
serving its markets, the Company leads with its disability insurance
expertise. The Company is the largest provider of individual disability
insurance with $1.4 billion of premium income in 1998, and the second largest
overall disability insurer in North America, on the basis of in-force
premiums, with an additional $354.1 million of group disability insurance
premium income in 1998. The skills required for disability risk management are
more highly specialized than those used in managing the risk of other life
insurance products. The Company believes that its risk management skills
represent a competitive advantage in the disability businesses. The Company
has made a number of recent improvements to its capabilities. In the claims
management area, for example, the Company has shifted from a geographic
distribution of workflow to an organization focused on impairments
(psychiatric, orthopedic, cardiac, and general medical) in order to provide
claimants with more specialized attention. The addition of GENEX's case
management and vocational rehabilitation expertise has enabled the Company to
further refine its efforts to assist disabled claimants to return to gainful
employment.

Utilize Multiple Distribution Channels to Reach Different Market
Segments. The Company's experience is that different distribution channels
reach different market segments. Therefore, its strategy is to distribute its
products through a number of channels in order to reach the broad individual
and employee benefits markets. The Company distributes its individual products
primarily through independent insurance brokers and agents, financial
planners, and corporate marketing agreements with other insurance companies.
It distributes employee benefits products primarily through brokers, benefits
consultants, and a direct sales force that calls on large corporations. All
products and distribution channels are supported through a network of 70
integrated sales and service offices in the United States, nine offices in
Canada, and non-field sales organizations located in Chattanooga, Tennessee,
Worcester, Massachusetts and Burlington, Ontario.

The Company believes there are substantial opportunities to increase sales
by improving the productivity of each of these distribution channels and
opening new distribution channels for its products. For example, the national
accounts distribution system, which involves the sales of the Company's
products by agents of other insurance companies, generates sales from a small
percentage of the agents of the national account companies. A major focus for
1998 was increasing the penetration of these national account relationships.

5

Align the Interests of the Company's Employees and Producers with those of
its Stockholders. The Company's strategic plan is supported by the goal of
raising employee stock ownership in the Company. Beginning in 1994, the
Company shifted its long-term cash compensation program for executives to a
stock-based plan, introduced ownership requirements of several times salary
for executive management, and instituted stock option and share grant plans
for executive and middle management. The Company continued to introduce new
programs to encourage ownership in 1995, establishing an employee stock
purchase plan open to all employees, introducing stock-based incentive awards,
and expanding the option program to field sales employees. Most recently, the
Company has created a stock-based plan for executives' short-term compensation
and has expanded its option plans to producers who meet certain sales and
profitability goals. These programs are intended to more closely align the
interests of employees, producers, and stockholders.

Prior to the implementation of these programs in 1994, there was little
employee ownership of common stock. The Company had 1,128,434 outstanding
options for shares of common stock on a split-adjusted basis as of December
31, 1993. As of December 31, 1998, employees owned more than 1.1 million
shares of common stock through the employee stock purchase and 401(k) plans,
and the Company had 6,737,932 outstanding options for shares of common stock.
Approximately 50 percent of the Company's employees participate in one or more
of these stock ownership programs.

Reporting Segments

The Company is organized around its customers, with reporting segments that
reflect its major market segments: Individual, Employee Benefits, and
Voluntary Benefits. The Other segment includes products that the Company no
longer actively markets. The Corporate segment includes revenue earned on
corporate assets, interest expense on corporate debt, and amortization of
goodwill. The Company's Individual reporting segment includes individual
disability insurance and individual life insurance. The Employee Benefits
segment includes group long- and short-term disability insurance, group life
insurance, accidental death and dismemberment coverages, and the results of
GENEX. The Voluntary Benefits segment includes employer-sponsored individual
products sold at the work site through payroll deduction. The Other segment
includes the results from GICs, group SPAs, corporate-owned life insurance
("COLI"), individual annuities, medical and dental, and medical stop-loss.

Individual. Individual disability comprises the majority of the segment,
with $1,392.0 million of premium income in 1998 and $1,207.7 million of
premium income in 1997. Individual life insurance products generated $82.4
million of premium income in 1998 and $78.9 million of premium income in 1997.

Individual disability income insurance provides the insured with a portion
of earned income lost as a result of sickness or injury. Under an individual
disability income policy, monthly benefits generally are fixed at the time the
policy is written. The benefits typically range from 30 percent to 75 percent
of the insured's monthly earned income. Various options with respect to length
of benefit periods and waiting periods before payment begins are available and
permit tailoring of the policy to a specific policyholder's needs. The Company
also markets individual disability income policies which include payments for
transfer of business ownership and business overhead expenses. Individual
disability income products do not provide for the accumulation of cash values.

Premium rates for these products are varied by age, sex, and occupation
based on assumptions concerning morbidity, persistency, policy related
expenses, and investment income. The Company develops its assumptions based on
its own claims experience and published industry tables. The Company's
underwriters evaluate the medical and financial condition of prospective
policyholders prior to the issuance of a policy.

The majority of the Company's in-force individual disability income
insurance was written on a noncancelable basis. Under a noncancelable policy,
as long as the insured continues to pay the fixed annual premium for the
policy's duration, the policy cannot be canceled by the Company nor can the
premium be raised. Due to the noncancelable, fixed premium nature of the
policies marketed in the past, profitability of this part of

6

the business of Accident and Provident Life and Casualty Insurance Company
("Casualty") is largely dependent upon achieving the morbidity and interest
rate assumptions set in the 1993 loss recognition study with respect to the
business written in 1993 and prior and those set in the pricing of business
written after 1993. The profitability of the Paul Revere business will be
largely dependent achieving the assumptions as to morbidity, persistency,
interest earned rates, and expense levels assumed when pricing the
acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 20 to 22.

In November 1994, the Company announced its intention to discontinue the
sale of individual disability products which combined lifetime benefits and
short elimination periods with own-occupation provisions (other than
conversion policies available under existing contractual arrangements). At the
same time the Company began introducing products that insured loss of earnings
as opposed to occupations, and these products generally contained more limited
benefit periods and longer elimination periods. Since the acquisition of Paul
Revere in March 1997, the Company has discontinued the sale of certain Paul
Revere products that are not consistent with the Company's strategic direction
for its product portfolio. The Company expects to continue to offer on a
limited basis selected Paul Revere products with own-occupation (while not
working) features applying stricter underwriting standards. The Company is in
the process of repricing these selected products and making modifications to
their features where appropriate. Going forward, the Company expects to offer
a limited portfolio of own-occupation based coverages along with its more
complete line of loss of earnings related disability coverages.

In contrast to traditional noncancelable own-occupation policies, for which
benefits are determined based on whether the insured can work in his or her
original occupation, the loss of earnings policy requires the policyholder to
satisfy two conditions for benefits to begin: reduced ability to work due to
accident or sickness and earnings loss of at least 20 percent. These policies
are aimed at repositioning the individual disability income product by making
it more attractive to a broader market of individual consumers, including
middle to upper income individuals and corporate benefit buyers.

The Company's life insurance offerings include term, universal life, and
interest-sensitive life insurance products. Universal life products provide
permanent life insurance with adjustable interest rates applied to the cash
value and are designed to achieve specific policyholder objectives such as
higher accumulation values and/or flexibility with respect to amount of
coverage and premium payments. The principal difference between fixed premium
and universal life insurance policies centers around policy provisions
affecting the amount and timing of premium payments. Under universal life
policies, policyholders may vary the frequency and size of their premium
payments, and policy benefits may fluctuate accordingly. Premium payments
under the fixed premium policies are not variable by the policyholder and, as
a result, generally reflect lower administrative costs than universal life
products for which extensive monitoring of premium payments and policy
benefits is required.

The largest number of ordinary life policies sold in 1997 and 1998 were ten-
year level term policies. These products have level premiums for an initial
ten-year period after which the policyholder may resubmit to the underwriting
process and possibly qualify for a new ten year period at the attained age
premiums; otherwise, premiums revert to a yearly renewable term premium which
increases annually. When measured by annualized premiums, universal life with
the flexibility and features described above was the largest product category
sold by the Company in this segment in recent years. Paul Revere's largest
product category is interest-sensitive whole life insurance.

Premium rates for the Company's life insurance products are based on
assumptions as to future mortality, investment yields, expenses, and lapses.
Although a margin for profit is included in setting premium rates, the actual
profitability of products is significantly affected by the variation of actual
experience from assumed experience. Profitability of fixed premium products is
also dependent upon investment income on reserves. The profitability of
interest-sensitive products is determined primarily by the ultimate
underwriting experience and the ability to maintain anticipated investment
spreads. The Company believes that the historical claims experience for these
products has been satisfactory.

7

From the Company's viewpoint, the risks involved with interest-sensitive
products include actual versus assumed mortality, achieving investment returns
that at least equal the current declared rate, competitive position of
declared rates on the policies, meeting the contractually guaranteed minimum
crediting rate, and recovery of policy acquisition costs. From the
policyholder's perspective, the risk involved with interest-sensitive products
is whether or not the declared rates on the policy will compare favorably with
the returns available elsewhere in the marketplace.

Employee Benefits. The Employee Benefits segment includes the results of
group products sold to employers for the benefit of employees and the results
of GENEX. Product offerings include disability, permanent and term life
insurance, and accidental death and dismemberment. Group disability comprises
the majority of the segment, with $354.1 million of premium income in 1998.
Group life generated $317.6 million of premium income in 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 22 to 23.

Group long-term disability insurance provides employees with insurance
coverage for loss of income in the event of extended work absences due to
sickness or injury. Services are offered to employers and insureds to
encourage and facilitate rehabilitation, retraining, and re-employment.
Premiums for this product are generally based on expected claims of a pool of
similar risks plus provisions for administrative expenses and profit. Some
cases, however, carry experience rating provisions. Premiums for experience
rated group disability business are based on the expected experience of the
client given their industry group, adjusted for the credibility of the
specific claim experience of the client. A few accounts are handled on an
administrative services only basis with responsibility for funding claim
payments remaining with the customer.

Profitability of group disability insurance is affected by deviations of
actual claims experience from expected claims experience and the ability of
the Company to control its administrative expenses. Morbidity is an important
factor in disability claims experience. Also important is the general state of
the economy; for example, during a recession the incidence of claims tends to
increase under this type of insurance. In general, experience rated disability
coverage for large groups has narrower profit margins and represents less risk
to the Company than business of this type sold to small employers. This is
because the Company must bear all of the risk of adverse claims experience in
small case coverages while larger employers often bear much of this risk
themselves. For disability coverages, case management and rehabilitation
activities with regard to claims, along with appropriate pricing and expense
control, are important factors contributing to profitability.

Group life insurance consists primarily of renewable term life insurance
with the coverages frequently linked to employees' wages. Profitability in
group life is affected by deviations of actual claims experience from expected
claims experience and the ability of the Company to control administrative
expenses. The Company also markets several group benefits products and
services including accident and sickness indemnity and accidental death and
dismemberment policies.

Voluntary Benefits. The Voluntary Benefits segment includes the results of
individual products sold to groups of employees through payroll deduction at
the work site ("voluntary benefits products"). The Company's premium income in
1998 totaled $84.2 million and consisted primarily of universal life and
interest-sensitive life products as well as health products, principally
intermediate disability income policies. Profitability of voluntary benefits
products is affected by the level of employee participation, persistency,
deviations of actual morbidity and mortality experience from expected
experience, and the ability of the Company to control administrative expenses.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on page 24.

Other. The Other segment includes the results of GICs, group SPAs, COLI,
individual annuities, medical and dental, and medical stop-loss. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 25 to 26.

Under GICs, the Company guarantees the principal and interest to the
contract holder for a specified period, generally three to five years. The
Company marketed GICs for use in corporate tax-qualified retirement plans

8

and derives profits from GICs on the spread between the amount of interest
earned on invested funds and the fixed rate guaranteed in the GIC. In December
1994, the Company discontinued the sale of GICs, but continues to service its
block of existing business. See "Reserves." Group SPAs are used as funding
vehicles primarily when defined benefit pension plans are terminated. The
Company also offers annuities as an employer-sponsored option for retirees
receiving their distributions from 401(k) plans. Pursuant to a group SPA
contract, the Company receives a one-time premium payment and in turn agrees
to pay a fixed monthly retirement benefit to specified employees. Sales of
group SPAs were discontinued in 1996. GICs accounted for $656.8 million and
group SPAs accounted for $1,185.6 million of accumulated funds under
management at December 31, 1998.

The Company believes that there are three primary sources of risk associated
with GICs and group SPAs. Underwriting risk represents the risk that a GIC has
been priced properly to reflect the risk of withdrawal and for group SPAs,
that the mortality rates and the ages and frequency at which annuitants will
retire have been accurately projected. Asset/liability risk represents the
risk that the investments purchased to back the products will adequately match
the future cash flows. Investment risk represents the risk that the underlying
investments backing the GICs and group SPAs will perform according to the
expectations of the Company at the time of purchase.

COLI is a tax-leveraged policy sold from 1983 to 1990, with most of the
block having been sold before June 21, 1986. Beginning in 1986, Congress began
to enact tax legislation that significantly reduced the ability of
policyholders to deduct policy loan interest on these products which detracted
from the internal rate of return which theretofore had been available. In
1988, Congress went further by enacting legislation that had adverse tax
consequences for distributions/policy loans from modified endowment contracts.
Under this legislation, new sales of the majority of the Company's COLI
products would have been subject to adverse tax treatment as modified
endowment contracts due to their high premium level. As a consequence, many of
these products were withdrawn, and revised products which would not be
considered modified endowment contracts were introduced. Policies issued prior
to June 21, 1986, however, were grandfathered from the modified endowment
provisions. In 1996, Congress enacted tax legislation which generally
eliminates tax deductions for policy loan interest on COLI products issued on
or after June 21, 1986.

Medical stop-loss insurance is provided to protect the insured against
significant adverse claims experience with respect to group medical coverage.
As commented on previously, the Company entered into an agreement in 1998 to
reinsure this block of business.

As previously discussed, during 1998 the Company sold its in-force
individual and tax-sheltered annuity business.

Corporate Segment. The Corporate segment consists of revenue earned on
corporate assets, interest expense on corporate debt, amortization of
goodwill, and certain corporate expenses not allocated to a line of business.

Reinsurance

The Company routinely reinsures portions of its business with other
insurance companies. In a reinsurance transaction a reinsurer agrees to
indemnify another insurer for part or all of its liability under a policy or
policies it has issued for an agreed upon premium. The maximum amount of risk
retained by the Company and not reinsured is $500,000 on any individual life
insured and $500,000 on individual accidental death insurance. The amount of
risk retained by the Company on individual disability income products varies
by policy type and year of issue. Since the ceding of reinsurance by the
Company does not discharge its primary liability to the policyholder, the
Company has control procedures with regard to reinsurance ceded. These
procedures include the exchange and review of financial statements filed with
regulatory authorities, exchange of Insurance Regulatory Information System
results, review of ratings by A.M. Best Company, determination of states in
which the reinsurer is licensed to do business, on-site visits before entering
a contract to assess the operations and management of the reinsurer,
consideration of the need for collateral, such as letters of credit, and
audits of the Company's reinsurance activities by its Internal Audit staff.
The Company also assumes reinsurance from other insurers. See "Note 12 to the
Notes to Consolidated Financial Statements" for further discussion.

9

Reserves

The applicable insurance laws under which insurance companies operate
require that they report, as liabilities, policy reserves to meet future
obligations on their outstanding policies. These reserves are the amounts
which, with the additional premiums to be received and interest thereon
compounded annually at certain assumed rates, are calculated to be sufficient
to meet the various policy and contract obligations as they mature. These laws
specify that the reserves shall not be less than reserves calculated using
certain specified mortality and morbidity tables, interest rates, and methods
of valuation. The reserves reported in the Company's financial statements
incorporated herein by reference are calculated based on generally accepted
accounting principles ("GAAP") and differ from those specified by the laws of
the various states and carried in the statutory financial statements of the
life insurance subsidiaries. These differences arise from the use of mortality
and morbidity tables and interest assumptions which are believed to be more
representative of the actual business than those required for statutory
accounting purposes and from differences in actuarial reserving methods.

The consolidated statements of income include the annual change in reserves
for future policy and contract benefits. The change reflects a normal
accretion for premium payments and interest buildup and decreases for policy
terminations such as lapses, deaths, and annuity benefit payments.

In addition to reserves for future policy and contract benefits, the Company
maintains a balance sheet liability for policyholders' funds. Policyholders'
funds, as shown on the Company's consolidated statements of financial
condition as of December 31, 1998, were $3,127.3 million. Of this amount,
$656.8 million reflected the Company's outstanding GICs, the maturity of which
is as follows (in millions):

1 year or less.................................................... $464.7
Over 1 year but less than 2 years................................. 156.5
Over 2 years but less than 3 years................................ 26.5
Over 3 years...................................................... 9.1
------
Total........................................................... $656.8
======

In the third quarter of 1996, Paul Revere recorded a reserve strengthening
of $380.0 million before income taxes. The reserve strengthening recorded was
prompted by the results of a comprehensive study of the adequacy of its
individual disability reserves under GAAP completed in October 1996. In
connection with such reserve study, Paul Revere received an actuarial report
from an independent actuarial firm, which report concluded that the net
individual disability reserves of $2.2 billion reported by Paul Revere at
September 30, 1996, which reflected the $380.0 million reserve strengthening
adjustment, were adequate on a GAAP basis, based on the assumptions reflected
therein.

Subsequently, Paul Revere completed, in cooperation with the Division of
Insurance of the Commonwealth of Massachusetts (the "Massachusetts Division of
Insurance"), a comprehensive study of the adequacy of its statutory individual
disability reserves, as a result of which Paul Revere's statutory reserves
were increased by $144.0 million before income taxes. Pursuant to an agreement
with the Company, dated as of April 29, 1996, Textron Inc. ("Textron"), then
the largest shareholder of Paul Revere, contributed to Paul Revere $121.0
million, representing the amount of required statutory reserve increases, net
of tax benefits.

Regarding the Company's proposed merger with UNUM, the Company and UNUM have
reviewed the anticipated disability claims experience, specifically the
assumptions around expected disability claims duration on existing claims,
considering the impact of the merger. The Company and UNUM anticipate that as
a result of integrating their respective claim operations, there will be a
temporary increase in claim costs. Each company expects that fewer claims will
be resolved or closed during the period when the two companies are planning
and implementing the integration of their claims organizations. The average
length of duration for claims will increase resulting in more benefit payments
being paid for a relatively short time until the consolidation of operations
is complete. During the fourth quarter 1998, the Company and UNUM increased
their claim reserves by approximately $93.6 million ($60.8 million after tax)
and $59.4 million ($38.6 million after tax), respectively,

10

related to the expected increase in disability claim duration on existing
claims. Additionally, the Company and UNUM are in the process of reviewing
their accounting policies and financial statement classifications. One aspect
of this preliminary review has indicated that UNUM's process and assumptions
used to calculate the discount rate for claim reserves of certain disability
businesses differs from that used by the Company. It has been determined that
the Company's process and assumptions are more appropriate in the context of a
combined entity. Upon completion of the merger, UNUM will reduce the rates
used to discount claim reserves for group long-term disability, individual
disability, and the disability businesses of UNUM Limited a UNUM subsidiary in
the UK. The preliminary estimates of discount rate reductions will result in
an estimated increase to UNUM's claim reserves upon consummation of the merger
of approximately $230.0 million ($150.0 million after tax).

See "Risk Factors--Reserves".

Competition

There is intense competition among insurance companies for the individual
and group insurance products of the types sold by the Company. At the end of
1998, there were over 2,000 legal reserve life insurance companies in the
United States, many offering one or more insurance products similar to those
marketed by the Company. The Company's principal competitors in the employee
benefits market include the largest insurance companies in the United States,
many of which have substantially greater financial resources and larger staffs
than the Company. In addition, in the individual life market, the Company
competes with banks, investment advisers, mutual funds, and other financial
entities for investment of savings and retirement funds in general. In the
individual and group disability markets, the Company competes in the United
States and Canada with a limited number of major companies and regionally with
other companies offering specialty products.

All areas of the employee benefits markets are highly competitive due to the
yearly renewable term nature of the products and the large number of insurance
companies offering products in this market. The Company competes with other
companies in attracting and retaining independent agents and brokers to
actively market its products. The principal competitive factors affecting the
Company's business are price and quality of service.

Regulation

The Company and its insurance subsidiaries are subject to detailed
regulation and supervision in the jurisdictions in which each does business.
With respect to the insurance subsidiaries, such regulation and supervision is
primarily for the protection of policyholders rather than for the benefit of
investors or creditors. Although the extent of such regulation varies, state
insurance laws generally establish supervisory agencies with broad
administrative powers.

These supervisory and administrative powers relate chiefly to the granting
and revocation of the licenses to transact business, the licensing of agents,
the approval of policy forms, reserve requirements, and the form and content
of required financial statements. As to the type and amounts of its
investments, the Company's insurance subsidiaries must meet the standards and
tests promulgated by the insurance laws and regulations of Tennessee,
Massachusetts, New York, Delaware, and certain other states in which they
conduct business.

The Company and its insurance subsidiaries are required to file various,
usually quarterly and/or annual, financial statements and are subject to
periodic and intermittent review with respect to their financial condition and
other matters by the various departments having jurisdiction in the states in
which they do business. The last such examination of Accident, Casualty and
National was completed on April 30, 1997, and covered operations for the five-
year period ending December 31, 1995. The final report was issued in the
second quarter of 1997, and no objections were raised by the reviewing
authorities as a result of that examination. The field work related to the
last financial examination of Paul Revere Life and Paul Revere Variable was
completed on March 27, 1997, and covered the operations for the four-year
period ending December 31, 1994. As a result of the examination, statutory
reserves were increased by $35.0 million, which adjustment was reflected in
the statutory

11

financial statements of Paul Revere Life as of December 31, 1995. The scope of
the examination was extended to include a review of the individual disability
income reserves as of September 30, 1996. As a result of that review, which
was completed on February 5, 1997, Paul Revere Life was required to increase
its statutory reserves by $144.0 million on a pre-tax basis or $121.0 million
on an after-tax basis. As a result of the reserve strengthening required, the
former parent of Paul Revere Life made additional capital contributions
totaling $121.0 million: $83.5 million was contributed in December 1996, and
the balance of $37.5 million was contributed on February 5, 1997. The
financial examination of Paul Revere Protective for the three-year period
ending December 31, 1996 has been completed, and the Company received the
final report in the first quarter of 1999. No objections were raised by the
reviewing authorities.

The laws of the states of Tennessee, Massachusetts, New York, and Delaware
require the registration of and periodic reporting by insurance companies
domiciled within their jurisdiction which control or are controlled by other
corporations or persons so as to constitute a holding company system. The
Company is registered as a holding company system in Tennessee, Massachusetts,
New York, and Delaware. The holding company statutes require periodic
disclosure concerning stock ownership and prior approval of certain
intercompany transactions within the holding company system. The Company may
from time to time be subject to regulation under the insurance and insurance
holding company statutes of one or more additional states. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 28.

The National Association of Insurance Commissioners ("NAIC") and insurance
regulators are re-examining existing laws and regulations and their
application to insurance companies. In particular, this re-examination has
focused on insurance company investment and solvency issues and, in some
instances, has resulted in new interpretations of existing law, the
development of new laws, and the implementation of non-statutory guidelines.
The NAIC has formed committees and appointed advisory groups to study and
formulate regulatory proposals on such diverse issues as the use of surplus
notes, accounting for reinsurance transactions, and the adoption of risk-based
capital rules. In 1998, the NAIC approved a codification of statutory
accounting practices effective January 1, 2001, which will serve as a
comprehensive and standardized guide to statutory accounting principles.
Following implementation, statutory accounting principles will continue to be
governed by individual state laws and permitted practices until adoption by
the various states. Accordingly, before codification becomes effective for
each of the Company's insurance subsidiaries, their state of domicile must
adopt codification as the prescribed basis of accounting. The adoption of the
codification will change, to some extent, the accounting practices that the
Company's insurance subsidiaries use to prepare their statutory financial
statements.

Risk Factors

Any one or more of the following factors may cause the Company's actual
results for various financial reporting periods to differ materially from
those expressed in any forward looking statements made by or on behalf of the
Company. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 28.

Reserves

The Company maintains reserves for future policy benefits and unpaid claims
expenses which include policy reserves and claim reserves established for its
individual disability insurance, group insurance, and individual life
insurance products. Policy reserves represent the portion of premiums received
which are reserved to provide for future claims. Claim reserves are
established for future payments not yet due on claims already incurred,
primarily relating to individual disability and group disability insurance
products. Reserves, whether calculated under GAAP or statutory accounting
practices, do not represent an exact calculation of future benefit liabilities
but are instead estimates made by the Company using actuarial and statistical
procedures. There can be no assurance that any such reserves would be
sufficient to fund future liabilities of the Company in all circumstances.
Future loss development could require reserves to be increased, which would
adversely affect earnings in current and future periods. Adjustments to
reserve amounts may be required in the event of changes

12

from the assumptions regarding future morbidity (the incidence of claims and
the rate of recovery, including the effects thereon of inflation and other
societal and economic factors), persistency, mortality, and interest rates
used in calculating the reserve amounts.

Capital Adequacy

The capacity for an insurance company's growth in premiums is in part a
function of its statutory surplus. Maintaining appropriate levels of statutory
surplus, as measured by state insurance regulators, is considered important by
state insurance regulatory authorities and the private agencies that rate
insurers' claims-paying abilities and financial strength. Failure to maintain
certain levels of statutory surplus could result in increased regulatory
scrutiny, action by state regulatory authorities, or a downgrade by the
private rating agencies.

Effective in 1993, the NAIC adopted a risk-based capital ("RBC") formula,
which prescribes a system for assessing the adequacy of statutory capital and
surplus for all life and health insurers. The basis of the system is a risk-
based formula that applies prescribed factors to the various risk elements in
a life and health insurer's business to report a minimum capital requirement
proportional to the amount of risk assumed by the insurer. The life and health
RBC formula is designed to measure annually (i) the risk of loss from asset
defaults and asset value fluctuation, (ii) the risk of loss from adverse
mortality and morbidity experience, (iii) the risk of loss from mismatching of
asset and liability cash flow due to changing interest rates, and (iv)
business risks. The formula is to be used as an early warning tool to identify
companies that are potentially inadequately capitalized. The formula is
intended to be used as a regulatory tool only and is not intended as a means
to rank insurers generally.

Based on computations made by the Company in accordance with the prescribed
life and health RBC formula, each of the Company's life insurance subsidiaries
exceeded the minimum capital requirements at December 31, 1998.

Disability Insurance

Disability insurance may be affected by a number of social, economic,
governmental, competitive, and other factors. Changes in societal attitudes,
work ethics, motivation, stability, and mores can significantly affect the
demand for and underwriting results from disability products. Economic
conditions affect not only the market for disability products, but also
significantly affect the claims rates and length of claims. The climate and
the nature of competition in disability insurance have also been markedly
affected by the growth of Social Security, worker's compensation, and other
governmental programs in the workplace. The nature of that portion of the
Company's outstanding insurance business that consists of noncancelable
disability policies, whereby the policy is guaranteed to be renewable through
the life of the policy at a fixed premium, does not permit the Company to
adjust its premiums on business in-force on account of changes resulting from
such factors. Disability insurance products are important products for the
Company. To the extent that disability products are adversely affected in the
future as to sales or claims, the business or results of operations of the
Company could be materially adversely affected.

Industry Factors

All of the Company's businesses are highly regulated and competitive. The
Company's profitability is affected by a number of factors, including rate
competition, frequency and severity of claims, lapse rates, government
regulation, interest rates, and general business considerations. There are
many insurance companies which actively compete with the Company in its lines
of business, some of which are larger and have greater financial resources
than the Company, and there is no assurance that the Company will be able to
compete effectively against such companies in the future.

In recent years, some U.S. life insurance companies have faced claims,
including class-action lawsuits, alleging various improper sales practices in
the sales of certain types of life insurance products. These claims often
relate to the selling of whole life and universal life policies that
accumulate cash values which may be utilized to fund the cost of the insurance
in later years of the policy. Due to subsequent reductions in dividends

13

or interest credited or due to other factors, the cash values have not
accumulated sufficiently to cover costs of insurance, resulting in the need
for ongoing premium payments. Although never a principal product line for the
Company or Paul Revere, both companies have sold a modest amount of interest-
sensitive whole life and universal life policies. There can be no assurance
that any future claims relating to sales of such policies will not have a
material adverse effect on the Company.

Merger with UNUM

The market value of UNUMProvident common stock issued in the merger will
depend upon the market value of the Company's common stock and UNUM common
stock at the completion of the merger. As a result of the reclassification and
the merger, each share of the Company's common stock will be reclassified and
converted into 0.73 of a share of UNUMProvident common stock. Because the
exchange ratio of 0.73 is fixed, the market value of UNUMProvident common
stock issued in the merger will depend upon the market prices of UNUM common
stock and the Company's common stock. These market values may fluctuate prior
to the completion of the merger and therefore may be different at the time the
merger is completed than they were at the time the merger agreement was signed
and the exchange ratio agreed upon and at the time of stockholder approval.
Accordingly, the Company's stockholders and UNUM's stockholders cannot be sure
of the market value of the UNUMProvident common stock that they will receive
in the merger.

The Company may fail to realize benefits anticipated by the parties. The
Company and UNUM expect significant benefits to result from the merger.
However, the merger involves the integration of two large companies that have
previously operated independently of each other, and the successful
combination of the two business enterprises may result in a diversion of
management attention for an extended period of time. In addition, such
integration is likely to lengthen the average disability claims duration for a
relatively short period of time following the completion of the merger. See
the preceding discussion in the "Reserves" section for the anticipated effect
on productivity and management's corresponding increase in claim reserves.
Further, the parties may not be able to achieve the anticipated enhanced
cross-selling opportunities, the development and marketing of more
comprehensive insurance product offerings, cost savings, revenue growth and
consistent use of best practices. Inability to realize the full extent of, or
any of, the anticipated benefits of the merger as well as delays encountered
in the transition process could have a material adverse effect upon the
revenues, level of expenses, operating results, and financial condition of
UNUMProvident. Accordingly, UNUMProvident may not realize the full extent of,
or any of, the anticipated benefits of the merger, and this failure may affect
the value of the UNUMProvident common stock.

The merger is subject to the receipt of consents and approvals from
government entities that may impose conditions that could have a material
adverse effect on UNUMProvident or cause abandonment of the merger. Completion
of the merger is conditioned upon the expiration or termination of the
applicable waiting period under the Hart-Scott-Rodino Act and the receipt of
consents, orders, approvals, and clearances from state and foreign
governmental entities. The terms and conditions of such consents, orders,
approvals, and clearances may require the divestiture of divisions, operations
or assets of UNUMProvident, may affect the license of an insurance subsidiary
of the Company or UNUM, or may impose other conditions which adversely affect
the ongoing operations of UNUMProvident. Such required divestitures or other
conditions, if any, may have a material adverse effect on the business,
financial condition, or results of operations of UNUMProvident or may cause
the abandonment of the merger by the Company or UNUM. The Company and UNUM
have not determined how they will respond to conditions, limitations, or
divestitures which may be required in connection with obtaining any consents,
orders, approvals, and clearances.

Selected Data Of Segments

Information regarding the operations of segments may be found under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 18 to 27.

Employees

At March 1, 1999, the Company had 3,725 full-time employees (excluding
GENEX), including 2,173 at its headquarters in Chattanooga, Tennessee, and
GENEX had 1,363 full time employees, including 172 in its home office in
Wayne, Pennsylvania.

14

Item 2. Properties

The Company's home office property consists of two connected office
buildings totaling 840,000 square feet at 1 Fountain Square, Chattanooga,
Tennessee. The office buildings and substantially all of the surrounding 25
acres of land, used primarily as parking lots, are owned by the Company in
fee. With the acquisition of Paul Revere in 1997, the Company also has a large
operations center and owns facilities in Worcester, Massachusetts comprised of
two connected buildings totaling 438,000 gross square feet of office space and
approximately 5.6 acres of land, used primarily as parking. In addition,
approximately 36,000 square feet of space is leased in three buildings located
in the Worcester area, and 15,000 square feet of office space is leased in
Springfield, Massachusetts. Total rents are approximately $0.6 million
annually.

The Company also leases other office space and minor storage space at
approximately 65 locations in 33 states in the United States and 14 locations
in 7 Canadian provinces for its sales and service force. The Company's real
property lease payments for 1998 were approximately $9.2 million (net of rents
received on subleased property).

Management of the Company believes that the Company's properties and the
properties which it leases are in good condition and are suitable and adequate
for the Company's current business operations.

Item 3. Legal Proceedings

In the ordinary course of its business operations, the Company is involved
in routine litigation with policyholders, beneficiaries, and others, and a
number of such lawsuits were pending as of the date of this filing. In the
opinion of management, the ultimate liability, if any, under these suits would
not have a material adverse effect on the consolidated financial condition or
the consolidated results of operations of the Company.

Two alleged class action lawsuits have been filed in Superior Court in
Worcester, Massachusetts ("the Court") against the Company--one purporting to
represent all career agents of Paul Revere whose employment relationships
ended on June 30, 1997 and were offered contracts to sell insurance policies
as independent producers, and the other purporting to represent independent
brokers who sold certain Paul Revere individual disability income policies
with benefit riders. Motions filed by the Company to dismiss most of the
counts in the complaints, which allege various breach of contract and
statutory claims, have been denied, but the cases remain at a preliminary
stage. To date, no class has been certified in either lawsuit. The Company has
filed a conditional counterclaim in each action which requests a substantial
return of commissions should the Court agree with the plaintiff's
interpretation of the contract. The Company has strong defenses to both
lawsuits and will vigorously defend its position and resist certification of
the classes. In addition, the same plaintiff's attorney who has filed the
purported class action lawsuits has filed 42 individual lawsuits on behalf of
current and former Paul Revere sales managers alleging various breach of
contract claims. The Company has filed a motion in federal court to compel
arbitration for 16 of the plaintiffs who are licensed by the National
Association of Securities Dealers and have executed the Uniform Application
for Registration or Transfer in the Securities Industry (Form U-4). The
Company has strong defenses and will vigorously defend its position in these
cases as well. Although the alleged class action lawsuits and the 42
individual lawsuits are in the early stages, management does not currently
expect these suits to materially affect the financial position or results of
operations of the Company.

Item 4. Submission Of Matters To A Vote Of Security Holders

None

15

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

Common stock of Provident Companies, Inc. is traded on the New York Stock
Exchange. The stock symbol is PVT. The Board of Directors declared a two-for-
one common stock split which was distributed on September 30, 1997. Historical
common stock information has been restated to reflect the stock split.

Market Price
-----------------
High Low Dividend
------ ------ --------

1998 1st Quarter............................... $ 38 7/8 $ 32 1/2 $0.10
2nd Quarter............................... 41 1/8 32 0.10
3rd Quarter............................... 38 32 7/8 0.10
4th Quarter............................... 42 7/16 26 1/8 0.10

1997 1st Quarter............................... $ 28 7/8 $ 23 3/16 $0.09
2nd Quarter............................... 30 26 0.09
3rd Quarter............................... 35 1/16 26 5/8 0.10
4th Quarter............................... 39 1/16 31 5/8 0.10

As of March 1, 1999, there were 1,725 registered holders of common stock.
The Company's dividend reinvestment plan offers shareholders of common stock a
convenient way to purchase additional shares of common stock without paying
brokerage, commission, or other service fees. More information and an
authorization form may be obtained by writing or calling the Company's
transfer agent, First Chicago Trust Company of New York. The toll-free
customer service number is 1-800-446-2617.

For information on restrictions relating to the Company's insurance
subsidiaries' ability to pay dividends to the Company see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 28 and "Note 16 of the Notes to Consolidated Financial Statements".

16

Item 6. Selected Financial Data

1998(1) 1997(2) 1996 1995 1994
---------- ---------- --------- --------- ---------
(in millions of dollars, except share data)

Income Statement Data
Premium Income.......... $ 2,347.4 $ 2,053.7 $ 1,175.7 $ 1,251.9 $ 1,382.6
Net Investment Income... 1,374.0 1,354.7 1,090.1 1,221.3 1,238.6
Net Realized Investment
Gains (Losses)......... 34.0 15.1 (8.6) (31.7) (30.1)
Other Income............ 182.6 129.7 34.7 113.8 171.1
---------- ---------- --------- --------- ---------
Total Revenue....... 3,938.0 3,553.2 2,291.9 2,555.3 2,762.2
Benefits and Changes in
Reserves............... 2,577.2 2,358.1 1,661.2 1,904.6 1,981.2
Operating Expenses...... 958.0 814.8 404.5 474.7 580.1
---------- ---------- --------- --------- ---------
Income Before Federal
Income Taxes........... 402.8 380.3 226.2 176.0 200.9
Federal Income Taxes.... 148.8 133.0 80.6 60.4 65.6
---------- ---------- --------- --------- ---------
Net Income.............. $ 254.0 $ 247.3 $ 145.6 $ 115.6 $ 135.3
========== ========== ========= ========= =========
Per Common Share Infor-
mation
Earnings--Basic......... $ 1.87 $ 1.88 $ 1.46 $ 1.13 $ 1.35
Earnings--Assuming Dilu-
tion................... $ 1.82 $ 1.84 $ 1.44 $ 1.13 $ 1.35
Stockholders' Equity at
End of Year............ $ 25.20 $ 23.11 $ 17.34 $ 16.48 $ 11.17
Stockholders' Equity
Excluding Net
Unrealized Gains and
Losses on Securities at
End of Year............ $ 19.88 $ 18.49 $ 16.34 $ 15.33 $ 14.46
Cash Dividends.......... $ .40 $ .38 $ .36 $ .36 $ .52
Weighted Average Common
Shares Outstanding
(000s)
--Basic............... 135,117.8 124,505.4 91,044.8 90,762.7 90,622.1
--Assuming Dilution... 138,269.2 127,253.2 92,154.5 90,931.8 90,729.9
Financial Position (at
End of Year)
Assets.................. $ 23,088.1 $ 23,177.6 $14,992.5 $16,301.3 $17,149.9
Long-term Debt,
Subordinated Debt
Securities, and
Preferred Stock........ $ 900.0 $ 881.2 $ 356.2 $ 356.2 $ 358.7
Stockholders' Equity.... $ 3,408.5 $ 3,279.3 $ 1,738.6 $ 1,652.3 $ 1,169.1

- --------
(1) An adjustment of $93.6 million for the anticipated increase in claims
duration considering the inpact of the merger with UNUM and an $8.0
million reserve strengthening for single premium annuities decreased
operating results for 1998 by $101.6 million before taxes and $66.0
million ($0.48 per common share assuming dilution) after taxes.
(2) The Company acquired GENEX Services, Inc. and The Paul Revere Corporation
on February 28, 1997, and March 27, 1997, respectively. These financial
results include the accounts and operating results from their respective
dates of acquisition. The difference in comparability of the years is
frequently attributed to this fact. See "Note 13 of the Notes to
Consolidated Financial Statements."

17

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Consolidated Results By Segment (1)

Year Ended December 31
-----------------------------
1998 1997 1996
--------- --------- -------
(in millions of dollars)

Premium Income
Individual..................................... $ 1,474.4 $ 1,286.6 $ 646.1
Employee Benefits.............................. 710.6 552.3 325.8
Voluntary Benefits............................. 84.2 79.3 70.6
Other.......................................... 78.2 135.5 133.2
--------- --------- -------
2,347.4 2,053.7 1,175.7
--------- --------- -------
Net Investment Income and Other Income
Individual..................................... 779.2 615.7 378.9
Employee Benefits.............................. 221.2 178.2 69.7
Voluntary Benefits............................. 32.2 29.2 26.8
Other.......................................... 496.4 638.5 625.4
Corporate...................................... 27.6 22.8 24.0
--------- --------- -------
1,556.6 1,484.4 1,124.8
--------- --------- -------
Total Revenue (Excluding Net Realized Invest-
ment Gains and Losses)
Individual..................................... 2,253.6 1,902.3 1,025.0
Employee Benefits.............................. 931.8 730.5 395.5
Voluntary Benefits............................. 116.4 108.5 97.4
Other.......................................... 574.6 774.0 758.6
Corporate...................................... 27.6 22.8 24.0
--------- --------- -------
3,904.0 3,538.1 2,300.5
--------- --------- -------
Benefits and Expenses
Individual..................................... 2,018.6 1,670.0 909.6
Employee Benefits.............................. 846.2 690.5 364.7
Voluntary Benefits............................. 93.2 93.4 82.7
Other.......................................... 488.5 681.8 679.8
Corporate...................................... 88.7 37.2 28.9
--------- --------- -------
3,535.2 3,172.9 2,065.7
--------- --------- -------
Income (Loss) Before Net Realized Investment
Gains and Losses and Federal Income Taxes
Individual..................................... 235.0 232.3 115.4
Employee Benefits.............................. 85.6 40.0 30.8
Voluntary Benefits............................. 23.2 15.1 14.7
Other.......................................... 86.1 92.2 78.8
Corporate...................................... (61.1) (14.4) (4.9)
--------- --------- -------
368.8 365.2 234.8
Net Realized Investment Gains (Losses)......... 34.0 15.1 (8.6)
--------- --------- -------
Income Before Federal Income Taxes............. 402.8 380.3 226.2
Federal Income Taxes........................... 148.8 133.0 80.6
--------- --------- -------
Net Income..................................... $ 254.0 $ 247.3 $ 145.6
========= ========= =======
Assets
Individual..................................... $12,200.1 $11,543.5
Employee Benefits.............................. 1,948.2 1,691.0
Voluntary Benefits............................. 495.2 449.0
Other.......................................... 7,166.4 8,313.2
Corporate...................................... 1,278.2 1,180.9
--------- ---------
$23,088.1 $23,177.6
========= =========

18

(1) Revenue earned on corporate assets, general corporate expenses, interest
expense on corporate debt, amortization of goodwill, and assets maintained
for general corporate purposes are included in the Corporate segment.
Assets have been allocated to the segments based upon identifiable
liabilities and allocated stockholders' equity.

Amounts for 1997 and 1996 have been reclassified to conform to current year
presentation.

Introduction

The Company acquired GENEX Services, Inc. ("GENEX") and The Paul Revere
Corporation ("Paul Revere") on February 28, 1997, and March 27, 1997,
respectively. The financial information contained herein includes the accounts
and operating results of GENEX and Paul Revere from the respective dates of
acquisition. Since GENEX and Paul Revere are reflected in the results for 1998
and 1997, and not 1996, the difference in comparability of the years is
frequently attributed to that fact.

Results for Affinity Groups, previously reported as a separate line of
business in the Employee Benefits segment, have been allocated by product type
to various other lines of business in the Employee Benefits and Other
segments. Results for Voluntary Benefits, previously included in the Employee
Benefits segment, are now reported as a separate segment. Results for
Corporate, previously included in the Other segment, are now reported as a
separate segment.

Management believes that the trends in new annualized sales in the
Individual and Employee Benefits segments are important for investors to
assess in their analysis of the Company's results of operations. The trends in
new sales are indicators of the level of market acceptance of new products,
particularly in the individual disability income line of business, and the
Company's potential for growth in its respective markets. The Company has
closely linked its various incentive compensation plans for management and
employees to the achievement of its goals for new sales.

The following discussion of operating results by segment excludes net
realized investment gains and losses from revenue and income before taxes. The
Company's investment focus has been on investment income to support its
insurance liabilities as opposed to the generation of realized investment
gains. Due to the nature of the Company's business, a long-term focus in
necessary to maintain profitability over the life of the business. The
realization of investment gains and losses will impact future earnings levels
as the underlying business is long-term in nature and requires that the
Company be able to sustain the assumed interest rates in its liabilities.
However, income excluding realized investment gains and losses does not
replace net income as a measure of the Company's profitability, and this
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.

Operating Results

Revenue excluding net realized investment gains and losses ("revenue")
increased $365.9 million, or 10.3 percent to $3,904.0 million in 1998 from
$3,538.1 million in 1997. Revenue includes premium income, net investment
income, and other income. This increase resulted from increased revenue in the
Individual segment ($351.3 million), Employee Benefits segment ($201.3
million), Voluntary Benefits segment ($7.9 million), and Corporate segment
($4.8 million). This increase was partly offset by lower revenue in the Other
segment ($199.4 million).

In 1997, revenue increased $1,237.6 million, or 53.8 percent, to $3,538.1
million from $2,300.5 million in 1996. This increase resulted from increased
revenue in the Individual segment ($877.3 million), Employee Benefits segment
($335.0 million), Voluntary Benefits segment ($11.1 million), and Other
segment ($15.4 million). This increase was partly offset by lower revenue in
the Corporate segment ($1.2 million).

Income before net realized investment gains and losses and federal income
taxes ("income") increased $3.6 million, or 1.0 percent, to $368.8 million in
1998 from $365.2 million in 1997. This increase resulted from

19

increased income in the Individual segment ($2.7 million), Employee Benefits
segment ($45.6 million), and Voluntary Benefits segment ($8.1 million). This
increase was partly offset by lower income in the Other segment ($6.1 million)
and Corporate segment ($46.7 million).

In 1997, income increased $130.4 million, or 55.5 percent, to $365.2 million
from $234.8 million in 1996. This increase resulted from increased income in
the Individual segment ($116.9 million), Employee Benefits segment ($9.2
million), Voluntary Benefits segment ($0.4 million), and Other segment ($13.4
million). This increase was partly offset by lower income in the Corporate
segment ($9.5 million).

Net income totaled $254.0 million in 1998, compared to $247.3 million in
1997 and $145.6 million in 1996. Net realized investment gains after federal
income taxes were $22.3 million in 1998 and $9.8 million in 1997, compared to
losses of $5.4 million in 1996.

Individual Segment Operating Results (1)

Year Ended December 31
---------------------------
1998 1997 1996
-------- -------- -------
(in millions of dollars)

Revenue Excluding Net Realized Investment Gains
and Losses
Premium Income
Individual Disability Income................... $1,392.0 $1,207.7 $ 582.8
Individual Life................................ 82.4 78.9 63.3
-------- -------- -------
Total Premium Income............................. 1,474.4 1,286.6 646.1
Net Investment Income............................ 736.0 589.8 371.8
Other Income..................................... 43.2 25.9 7.1
-------- -------- -------
Total............................................ 2,253.6 1,902.3 1,025.0
-------- -------- -------
Benefits and Expenses
Policy and Contract Benefits..................... 936.8 771.6 459.6
Change in Reserves for Future Policy and Contract
Benefits and Policyholders' Funds............... 524.4 425.3 221.3
Commissions...................................... 235.3 211.8 116.9
Increase in Deferred Policy Acquisition Costs.... (67.5) (53.2) (2.3)
Amortization of Value of Business Acquired....... 33.6 26.8 0.5
Other Operating Expenses......................... 356.0 287.7 113.6
-------- -------- -------
Total............................................ 2,018.6 1,670.0 909.6
-------- -------- -------
Income Before Net Realized Investment Gains and
Losses and Federal Income Taxes................. $ 235.0 $ 232.3 $ 115.4
======== ======== =======
Sales--Annualized New Premiums
Individual Disability Income................... $ 114.6 $ 103.9 $ 45.1
Individual Life................................ 8.8 9.6 6.7

- --------
(1) Results for 1997 and 1996 have been reclassified to conform to current
year presentation.

Revenue in the Individual segment increased $351.3 million, or 18.5 percent,
to $2,253.6 million in 1998 from $1,902.3 million in 1997. The increase was
primarily the result of the acquisition of Paul Revere. Premium income in this
segment increased $187.8 million, or 14.6 percent, to $1,474.4 million in 1998
from $1,286.6 million in 1997. Both the individual disability income and
individual life lines of business produced increases in premium income. Also
in this segment, net investment income increased $146.2 million, or 24.8
percent, to $736.0 million in 1998 from $589.8 million in 1997, primarily due
to the acquisition of Paul Revere and increased capital allocation. Management
expects that premium income in the Individual segment will begin to

20

grow on a year-over-year basis as the product transition in the individual
disability income line of business begins to produce increasing levels of new
sales of individual disability products.

In 1997, revenue in the Individual segment increased $877.3 million, or 85.6
percent, to $1,902.3 million from $1,025.0 million in 1996. The increase was
primarily the result of the acquisition of Paul Revere, which contributed
$851.9 million of revenue to this segment in 1997. Premium income in this
segment increased $640.5 million, or 99.1 percent, to $1,286.6 million in 1997
from $646.1 million in 1996. The increase was primarily the result of the
acquisition of Paul Revere, which contributed $636.5 million of premium income
to this segment in 1997. Within this segment, revenue in the individual
disability income line of business increased $840.1 million, or 94.1 percent,
to $1,733.1 million in 1997 from $893.0 million in 1996. Revenue in the
individual life line of business increased $37.2 million, or 28.2 percent, to
$169.2 million in 1997 from $132.0 million in 1996. Both of these lines of
business benefited from the Paul Revere acquisition.

In November 1994, the Company announced its intention to discontinue the
sale of individual disability products which combined lifetime benefits and
short elimination periods with own-occupation provisions (other than
conversion policies available under existing contractual arrangements). At the
same time the Company began introducing products that insured "loss of
earnings" as opposed to occupations, and these products generally contained
more limited benefit periods and longer elimination periods. Since the
acquisition of Paul Revere in March 1997, the Company has discontinued the
sale of certain Paul Revere products that are not consistent with the
Company's strategic direction for its product portfolio. The Company expects
to continue to offer selected Paul Revere products with own-occupation (while
not working) features applying stricter underwriting standards. The Company
has filed new rates for some of these products and is in the process of
repricing other of these selected products and making modifications to their
features where appropriate. Going forward, the Company expects to offer a
limited portfolio of own-occupation based coverages along with its more
complete line of loss of earnings related disability coverages.

In the fourth quarter of 1998, new annualized sales in the individual
disability income line totaled $33.5 million, compared to $28.2 million in the
third quarter of 1998 and $29.8 million in the fourth quarter of 1997,
reflecting the continued product transition. On a pro forma basis, sales of
individual disability income contracts declined in 1998 to $114.6 million from
$127.3 million in 1997, reflecting the planned discontinuance of certain
products and restructuring of others and, secondarily, with the consolidation
of the Company's and Paul Revere's sales offices and related realignment of
the field sales force.

Revenue is not expected to be significantly impacted by the transition in
products due to continued favorable persistency. The magnitude and duration of
the decline in sales from previous years, such as that experienced during 1997
and 1998, are dependent on the response of customers and competitors in the
industry.

Income in the Individual segment increased $2.7 million, or 1.2 percent, to
$235.0 million in 1998 from $232.3 million in 1997. The increase in this
segment was primarily the result of increased income in the individual life
line of business to $36.0 million in 1998 from $28.7 million in 1997 due to
the acquisition of Paul Revere and higher net investment income. Income in the
individual disability income line of business declined $4.6 million, or 2.3
percent, to $199.0 million in 1998 from $203.6 million in 1997. This decline
is primarily due to an $81.0 million increase in the individual disability
reserves for existing claims related to the expected increase in claims
duration due to management's expectation that productivity in the claims
organization will be impacted as a result of planning, consolidation, and
integration efforts related to the Company's merger with UNUM Corporation
("UNUM"). The impact on productivity is expected to lengthen the average
claims duration for a relatively short period of time until the new claims
organization completes its transition process following the merger.

In 1997, income in the Individual segment increased $116.9 million, or 101.3
percent, to $232.3 million from $115.4 million in 1996. This increase is
primarily due to the acquisition of Paul Revere and improved results in the
Company's individual disability income line of business. In this line, income
increased $112.3 million, or 123.0 percent, to $203.6 million in 1997 from
$91.3 million in 1996. This improvement is primarily

21

due to the acquisition of Paul Revere and a higher level of net claim
resolutions. Management believes the substantial investment in the individual
disability claims management process since the first quarter of 1995 helped
produce the improvement that occurred in this line. The major elements of this
investment include an emphasis on early intervention to better respond to the
specific nature of the claims, increased specialization to properly adjudicate
the increasingly specialized nature of disability claims, and an increased
level of staffing with experienced claim adjusters. The individual life line
of business produced income of $28.7 million in 1997, an increase of $4.6
million, or 19.1 percent, over the $24.1 million in 1996. The increase is the
result of the acquisition of Paul Revere.

Employee Benefits Segment Operating Results (1)

Year Ended December 31
---------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

Revenue Excluding Net Realized Investment Gains
and Losses
Premium Income
Long-term Disability............................ $ 261.1 $ 185.2 $ 69.1
Short-term Disability........................... 93.0 66.6 30.3
Group Life...................................... 317.6 270.2 204.7
Accidental Death and Dismemberment.............. 38.9 30.3 21.7
-------- -------- --------
Total Premium Income.............................. 710.6 552.3 325.8
Net Investment Income............................. 123.2 101.5 66.7
Other Income...................................... 98.0 76.7 3.0
-------- -------- --------
Total............................................. 931.8 730.5 395.5
-------- -------- --------
Benefits and Expenses
Policy and Contract Benefits...................... 547.8 416.0 250.5
Change in Reserves for Future Policy and Contract
Benefits and Policyholders' Funds................ 58.1 64.6 49.3
Commissions....................................... 51.7 40.3 13.4
(Increase) Decrease in Deferred Policy Acquisition
Costs............................................ (8.6) 2.1 2.6
Other Operating Expenses.......................... 197.2 167.5 48.9
-------- -------- --------
Total............................................. 846.2 690.5 364.7
-------- -------- --------
Income Before Net Realized Investment Gains and
Losses and Federal Income Taxes.................. $ 85.6 $ 40.0 $ 30.8
======== ======== ========
Sales--Annualized New Premiums
Long-term Disability............................ $ 73.1 $ 35.5 N/A
Short-term Disability........................... 38.3 35.4 N/A
Group Life...................................... 78.4 50.7 $ 27.8
Accidental Death and Dismemberment.............. 7.0 4.5 12.5

- --------
(1) Results for 1997 and 1996 have been reclassified to conform to current
year presentation.

Revenue in the Employee Benefits segment increased $201.3 million, or 27.6
percent, to $931.8 million in 1998 from $730.5 million in 1997. Premium income
in this segment increased $158.3 million, or 28.7 percent, to $710.6 million
in 1998 from $552.3 million in 1997. The increase is the result of the
acquisition of Paul Revere and increased premium income in the group
disability, group life, and accidental death and dismemberment lines of
business. Revenue from GENEX totaled $92.3 million in 1998 compared to $72.3
million in 1997 subsequent to its acquisition.

In 1997, revenue in the Employee Benefits segment increased $335.0 million,
or 84.7 percent, to $730.5 million from $395.5 million in 1996. The increase
was primarily the result of an increase in premium income in

22

this segment of $226.5 million, or 69.5 percent, to $552.3 million in 1997
from $325.8 million in 1996. The increase was primarily the result of the
acquisition of Paul Revere, which added to premium income in the group life
and group disability lines of business. In 1997, Paul Revere added $211.4
million to premium income and $241.3 million to revenue. GENEX contributed
$72.3 million of revenue in 1997 subsequent to its acquisition.

Income in the Employee Benefits segment increased $45.6 million, or 114.0
percent, to $85.6 million in 1998 from $40.0 million in 1997. The increase is
primarily the result of the acquisition of Paul Revere and improved results in
the group disability, group life, accidental death and dismemberment, and
GENEX lines of business. The group disability line of business produced income
of $39.4 million in 1998 compared to $15.3 million in 1997, primarily due to
the acquisition of Paul Revere and the impact of updated factors used in
calculating Social Security offset amounts and probabilities and claim
termination rates, resulting from year-end 1997 group disability reserve
studies. Included in the results from this line for 1998 is a $12.6 million
increase in group disability reserves for existing claims related to the
expected increase in claims duration due to management's expectation that
productivity in the claims organization will be impacted as a result of
planning, consolidation, and integration efforts related to the Company's
merger with UNUM. Also in this segment, income in the group life and
accidental death and dismemberment lines increased to $41.0 million in 1998
from $22.7 million in 1997. Income for GENEX increased to $5.2 million in 1998
from $2.0 million in 1997.

In 1997, income in the Employee Benefits segment increased $9.2 million, or
29.9 percent, to $40.0 million from $30.8 million in 1996. This increase was
primarily due to increased income in the group disability line of business,
which increased $9.5 million to $15.3 million in 1997 from $5.8 million in
1996. This increase was primarily due to the acquisition of Paul Revere. Also
within this segment, GENEX produced income of $2.0 million in 1997. These
results were partly offset by lower income in the group life and accidental
death and dismemberment lines of business, which produced income of $22.7
million in 1997, compared to $25.0 million in 1996.

23

Voluntary Benefits Segment Operating Results

Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

Revenue Excluding Net Realized Investment Gains
and Losses
Premium Income
Life........................................... $ 69.5 $ 64.5 $ 55.3
Disability..................................... 12.9 13.5 14.3
Other.......................................... 1.8 1.3 1.0
-------- -------- -------
Total Premium Income............................. 84.2 79.3 70.6
Net Investment Income............................ 27.1 25.2 23.3
Other Income..................................... 5.1 4.0 3.5
-------- -------- -------
Total............................................ 116.4 108.5 97.4
-------- -------- -------
Benefits and Expenses
Policy and Contract Benefits..................... 44.2 42.3 36.5
Change in Reserves for Future Policy and Contract
Benefits and Policyholders' Funds............... 17.4 21.0 21.9
Commissions...................................... 23.4 20.0 14.4
Increase in Deferred Policy Acquisition Costs.... (14.6) (11.9) (7.8)
Other Operating Expenses......................... 22.8 22.0 17.7
-------- -------- -------
Total............................................ 93.2 93.4 82.7
-------- -------- -------
Income Before Net Realized Investment Gains and
Losses and Federal Income Taxes................. $ 23.2 $ 15.1 $ 14.7
======== ======== =======
Sales--Annualized New Premiums
Life........................................... $ 24.3 $ 25.4 $ 19.5
Disability..................................... 4.7 2.6 2.9
Other.......................................... 0.9 0.7 0.6

Revenue in the Voluntary Benefits segment increased $7.9 million, or 7.3
percent, to $116.4 million in 1998 from $108.5 million in 1997. The increase
is primarily the result of an increase in premium income in this segment of
$4.9 million, or 6.2 percent, to $84.2 million in 1998 from $79.3 million in
1997. Also in this segment, net investment income increased $1.9 million, or
7.5 percent, to $27.1 million in 1998 from $25.2 million in 1997. New sales in
this segment increased 4.2 percent to $29.9 million in 1998 from $28.7 million
in 1997.

In 1997, revenue in the Voluntary Benefits segment increased $11.1 million,
or 11.4 percent, to $108.5 million from $97.4 million in 1996. The increase is
primarily the result of an increase in premium income of $8.7 million, or 12.3
percent, to $79.3 million in 1997 from $70.6 million in 1996. Also in this
segment, net investment income increased $1.9 million, or 8.2 percent, to
$25.2 million in 1997 from $23.3 million in 1996. New sales in this segment
increased 24.8 percent in 1997 to $28.7 million from $23.0 million in 1996.

Income in the Voluntary Benefits segment increased $8.1 million, or 53.6
percent, to $23.2 million in 1998 from $15.1 million in 1997. The increase is
primarily the result of an increase in revenue as well as improved mortality
experience in 1998 relative to 1997.

In 1997, income in the Voluntary Benefits segment increased $0.4 million, or
2.7 percent, to $15.1 million from $14.7 million in 1996, primarily as a
result of an increase in revenue and an improved mortality experience.

24

Other Segment Operating Results(1)

Year Ended December 31
---------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

Revenue Excluding Net Realized Investment Gains
and Losses
Premium Income.................................... $ 78.2 $ 135.5 $ 133.2
Net Investment Income............................. 460.8 617.6 606.5
Other Income...................................... 35.6 20.9 18.9
-------- -------- --------
Total............................................. 574.6 774.0 758.6
-------- -------- --------
Benefits and Expenses
Policy and Contract Benefits...................... 276.3 457.9 469.9
Change in Reserves for Future Policy and Contract
Benefits and Policyholders' Funds................ 172.2 159.4 152.2
Commissions....................................... 19.9 33.6 23.6
(Increase) Decrease in Deferred Policy Acquisition
Costs............................................ -- (6.1) 0.1
Other Operating Expenses.......................... 20.1 37.0 34.0
-------- -------- --------
Total............................................. 488.5 681.8 679.8
-------- -------- --------
Income Before Net Realized Investment Gains and
Losses and Federal Income Taxes.................. $ 86.1 $ 92.2 $ 78.8
======== ======== ========
Funds Under Management
Guaranteed Investment Contracts................. $ 656.8 $1,603.6 $3,204.3
Group Single Premium Annuities.................. 1,185.6 1,199.1 1,188.1

- --------
(1) Results for 1997 and 1996 have been reclassified to conform to current
year presentation.

The Other operating segment includes results from products no longer
actively marketed, including corporate-owned life insurance ("COLI"), group
pension, medical stop-loss, medical and dental, and individual annuities. The
closed blocks of business have been segregated for reporting and monitoring
purposes.

Effective January 1, 1998, the Company entered into an agreement with
Connecticut General Life Insurance Company ("Connecticut General") for
Connecticut General to reinsure, on a 100% coinsurance basis, the Company's
in-force medical stop-loss insurance coverages sold to clients of CIGNA
Healthcare and its affiliates ("CIGNA"). This reinsured block constitutes
substantially all of the Company's medical stop-loss insurance business. The
small portion remaining consists of medical stop-loss coverages sold to
clients other than those of CIGNA. These coverages will not be renewed. The
medical stop-loss business produced revenue of $14.1 million, $38.0 million,
and $50.6 million and income of $1.6 million, $6.6 million, and $10.2 million
for the years ended 1998, 1997, and 1996, respectively.

On April 30, 1998, the Company closed the sale of its in-force individual
and tax-sheltered annuity business to American General Annuity Insurance
Company and The Variable Annuity Life Insurance Company, affiliates of
American General Corporation ("American General"). The sale was effected by
reinsurance in the form of 100% coinsurance agreements whereby the financial
liability for the various annuity lines was transferred to American General.
The responsibility for providing administrative services was also assumed by
American General pursuant to various administrative services agreements with
the American General affiliates. The in-force business sold consisted
primarily of individual fixed annuities and tax-sheltered annuities in
Provident Life and Accident Insurance Company ("Accident"), Provident National
Assurance Company ("National"), The Paul Revere Life Insurance Company ("Paul
Revere Life"), The Paul Revere Variable Annuity Insurance Company ("Paul
Revere Variable")and The Paul Revere Protective Life Insurance Company ("Paul
Revere Protective"). In addition, American General acquired a number of
miscellaneous group pension lines of business sold in the 1970s and 1980s
which were no longer actively marketed by the Company. Pursuant to an
administrative services agreement, an affiliate of American General is
providing administrative services to registered separate accounts

25

of Paul Revere Variable and National. The sale does not include the Company's
block of guaranteed investment contracts ("GICs") or group single premium
annuities ("SPAs"), which will continue in a run-off mode. In consideration
for the transfer of the approximately $2.4 billion of statutory reserves,
American General paid the Company a ceding commission of approximately $58.0
million. See "Note 14 of the Notes to Consolidated Financial Statements" for
further discussion.

In 1997, the Company transferred its dental business to Ameritas Life
Insurance Corp. The dental block, which was acquired in the Paul Revere
acquisition, produced $39.2 million in premium income in 1997 and $48.3
million in 1996.

Revenue in the Other segment declined $199.4 million, or 25.8 percent, to
$574.6 million in 1998 from $774.0 million in 1997. The decline in revenue in
this segment is primarily due to lower net investment income, which declined
$156.8 million, or 25.4 percent, to $460.8 million in 1998 from $617.6 million
in 1997. This decline is primarily the result of a decrease in GIC funds under
management from $1,603.6 million as of December 31, 1997, to $656.8 million as
of December 31, 1998, resulting from the strategic decision to discontinue the
sale of GICs. Also in this segment, premium income declined $57.3 million, or
42.3 percent, to $78.2 million in 1998 from $135.5 million in 1997. This
decline is primarily due to the transfer of the dental block in 1997.

In 1997, revenue in the Other segment increased $15.4 million, or 2.0
percent, to $774.0 million from $758.6 million in 1996. This increase is
primarily the result of the acquisition of Paul Revere, which added $150.4
million of revenue in 1997, including $119.1 million of revenue in the
individual annuity line of business. This increase was partly offset by a
decline in funds under management resulting from the discontinuation of the
sale of products in the group pension line of business. Revenue in this line
of business declined $107.8 million to $300.6 million in 1997 from $408.4
million in 1996. Revenue in the corporate-owned life insurance line of
business increased by $9.0 million, or 4.5 percent, to $210.3 million in 1997
from $201.3 million in 1996, primarily due to increased net investment income.

Income in the Other segment declined $6.1 million, or 6.6 percent, to $86.1
million in 1998 from $92.2 million in 1997. The decline in this segment was
due in part to the sale of the individual annuity line and the reinsurance of
the medical stop-loss line. Income in the group pension line of business also
declined to $21.7 million in 1998 from $35.3 million in 1997 primarily due to
the result of lower funds under management and lower income from a reduced
amount of capital allocated to this line. In addition, the Company recorded an
$8.0 million reserve strengthening for group SPAs during 1998. This decline
was partly offset by improved income in the COLI line of business which
increased to $27.9 million in 1998 from $19.4 million in 1997.

In 1997, income in the Other segment increased $13.4 million, or 17.0
percent, to $92.2 million from $78.8 million in 1996. This increase was
primarily the result of higher income in the individual annuities line of
business, which increased to $17.9 million in 1997 from $1.9 million in 1996,
due to the acquisition of Paul Revere. This increase was partly offset by
lower income in the group pension line of business, which produced income of
$35.3 million in 1997, a decline of $12.3 million, or 25.8 percent, from $47.6
million in 1996. The medical stop-loss line also produced lower income in
1997, declining $3.6 million, or 35.3 percent, to $6.6 million in 1997 from
$10.2 million in 1996.

The Other segment contains lines of business that are no longer actively
marketed by the Company and are in run-off mode. It is expected that revenue
and earnings in this segment will decline over time as these business lines
wind down. The run-off of the group pension line results in a decline in
assets under management and, in turn, a continued decline in the net
investment income produced by the assets. Management expects to reinvest the
capital supporting these lines of business in the future growth of the
Individual and Employee Benefits segments.

26

Corporate Segment Operating Results

The Corporate segment includes investment earnings on corporate assets not
specifically allocated to a line of business, corporate interest expense,
amortization of goodwill, and certain corporate expenses not allocated to a
line of business.

Revenue in the Corporate segment increased $4.8 million, or 21.1 percent, to
$27.6 million in 1998 from $22.8 million in 1997. This increase is primarily
the result of higher net investment income from unallocated capital and
surplus.

In 1997, revenue in the Corporate segment declined $1.2 million, or 5.0
percent, to $22.8 million from $24.0 million in 1996. This decline is
primarily the result of a lower level of net investment income from
unallocated capital and surplus.

The Corporate segment reported a loss of $61.1 million in 1998 compared to a
loss of $14.4 million in 1997. Interest and debt expense increased to $62.1
million in 1998 from $39.9 million in 1997. Also, amortization of goodwill
increased to $21.4 million in 1998 from $12.6 million in 1997, reflecting the
acquisitions of Paul Revere and GENEX.

In 1997, the Corporate segment reported a loss of $14.4 million compared to
a loss of $4.9 million in 1996. Interest and debt expense increased to $39.9
million in 1997 from $12.4 million in 1996. Also, amortization of goodwill
increased to $12.6 million in 1997 as a result of the acquisition of Paul
Revere and GENEX.

Liquidity And Capital Resources

On March 27, 1997, the Company consummated the acquisition of Paul Revere,
which was financed through common equity issuance to Zurich Insurance Company,
a Swiss insurer, and its affiliates, common equity issuance and cash to Paul
Revere stockholders, debt, and internally generated funds. The debt financing
was provided through an $800.0 million revolving bank credit facility with
various domestic and international banks. The revolving bank credit facility
was established in 1996 to provide partial financing for the purchase of Paul
Revere and GENEX, to refinance the existing bank term notes of $200.0 million,
and for general corporate uses. At December 31, 1997, outstanding borrowings
under the revolving bank credit facility were $725.0 million. The revolving
bank credit facility was repaid on February 24, 1998. The Company also
redeemed its outstanding 8.10% cumulative preferred stock, which had an
aggregate value of $156.2 million, on February 24, 1998. The debt repayment
and preferred stock redemption were funded through short-term borrowing.

On March 16, 1998, the Company completed a public offering of $200.0 million
of 7.25% senior notes due March 15, 2028. On March 16, 1998, Provident
Financing Trust I, a wholly-owned subsidiary trust of the Company, issued
$300.0 million of 7.405% capital securities in a public offering. These
capital securities, which mature on March 15, 2038, are fully and
unconditionally guaranteed by the Company, have a liquidation value of $1,000
per capital security, and have a mandatory redemption feature under certain
circumstances. The Company issued $300.0 million of 7.405% junior subordinated
deferrable interest debentures, which mature on March 15, 2038, to the
subsidiary trust in connection with the capital securities offering. The sole
assets of the subsidiary trust are the junior subordinated debt securities.

In April 1998, the Company entered into a $150.0 million five-year revolving
credit facility and a $150.0 million 364-day revolving credit facility with
various domestic and international banks. The purpose of the facilities is for
general corporate purposes. There are no outstanding borrowings under either
of the credit facilities.

In July 1998, the Company completed a public offering of $200.0 million of
6.375% senior notes due July 15, 2005, and $200.0 million of 7.0% senior notes
due July 15, 2018.

The proceeds from these offerings funded the repayment of the short-term
borrowing used for the February 1998 debt repayment and preferred stock
redemption.

27

The Company believes the cash flow from its operations will be sufficient to
meet its operating and financial cash flow requirements. Periodically, the
Company may issue debt or equity securities to fund internal expansion,
acquisitions, investment opportunities, and the retirement of the Company's
debt and equity.

As a holding company, the Company is dependent upon payments from its
wholly-owned insurance subsidiaries and GENEX to pay dividends to its
stockholders and to pay its expenses. These payments by the Company's
subsidiaries may take the form of either dividends or interest payments on
amounts loaned to such subsidiaries by the Company or expense reimbursement.
At December 31, 1998, the Company had outstanding from its insurance
subsidiaries a $150.0 million surplus debenture due in 2006 with a weighted
average interest rate during 1998 of 7.9% and a $100.0 million surplus
debenture due in 2027 with a weighted average interest rate during 1998 of
8.3%. Semi-annual interest payments are conditional upon the approval by the
insurance department of the state of domicile.

State insurance laws generally restrict the ability of insurance companies
to pay cash dividends or make other payments to their affiliates in excess of
certain prescribed limitations. In the Company's insurance subsidiaries'
states of domicile, regulatory approval is required if an insurance company
seeks to make loans to affiliates in amounts equal to or in excess of three
percent of the insurer's admitted assets or to pay cash dividends in any
twelve month period in excess of the greater of such company's net gain from
operations of the preceding year or ten percent of its surplus as regards
policyholders as of the preceding year end, each as determined in accordance
with accounting practices prescribed or permitted by insurance regulatory
authorities. The Company anticipates that $153.3 million will be available in
1999 for such purposes without regulatory approval.

The Company's liquidity requirements are met primarily by cash flow provided
from operations, principally in its insurance subsidiaries. Premium and
investment income, as well as maturities and sales of invested assets, provide
the primary sources of cash. Cash flow from operations was sufficient in 1998.
Cash is applied to the payment of policy benefits, costs of acquiring new
business (principally commissions) and operating expenses as well as purchases
of new investments. The Company has established an investment strategy that
management believes will provide for adequate cash flow from operations.

As a result of the release of capital generated by the run-off of the GIC
portfolio, the sale of the commercial mortgage loans and other corporate
actions, the Company has increased its available capital to support the growth
of its businesses, including assisting in the financing of the acquisitions of
Paul Revere and GENEX. Management continues to analyze potential opportunities
to utilize the capital to further enhance stockholder value, including
exploring options that would support the Company's growth initiatives.

In November 1998, the Company announced its plans to merge with UNUM, a
leading provider of disability products and other employee benefits, in a
transaction that will create UNUMProvident Corporation. See "Note 17 of the
Notes to Consolidated Financial Statements" for further discussion.

Market Risks

The Company is subject to various market risk exposures including interest
rate risk and foreign exchange rate risk. The following discussion regarding
the Company's risk management activities includes forward-looking statements
that involve risk and uncertainties. Estimates of future performance and
economic conditions are reflected assuming certain changes in market rates and
prices were to occur (sensitivity analysis). Caution should be used in
evaluating the Company's overall market risk from the information presented
below, as actual results may differ. The Company employs various derivative
programs to manage these material market risks. See "Notes 3 and 4 of the
Notes to Consolidated Financial Statements" for further discussions of the
qualitative aspects of market risk, including derivative financial instrument
activity.

Interest Rate Risk

The operations of the Company are subject to risk resulting from interest
rate fluctuations, primarily long-term U.S. interest rates. Changes in
interest rates and individuals' behavior affect the amount and timing of asset
and liability cash flows. Management continually models and tests asset and
liability portfolios to improve

28

interest rate risk management and net yields. Testing the asset and liability
portfolios under various interest rate and economic scenarios allows
management to choose the most appropriate investment strategy, as well as to
prepare for disadvantageous outcomes. This analysis is the precursor to the
Company's activities in derivative financial instruments. The Company uses
interest rate swaps, interest rate forward contracts, exchange-traded interest
rate futures contracts, and options to hedge interest rate risks and to match
asset durations and cash flows with corresponding liabilities.

Assuming an immediate increase of 100 basis points in interest rates from
the December 31, 1998 levels, the net hypothetical decrease in stockholders'
equity related to financial and derivative instruments is estimated to be
$455.2 million at December 31, 1998. Additionally, the fair value of those
assets currently reported in the Consolidated Statements of Financial
Condition at their amortized cost or unpaid balances, namely held-to-maturity
securities and policy loans, would decrease by $36.0 million and $179.9
million, respectively. Assuming a 100 basis point decrease in long-term
interest rates from the December 31, 1998 level, the fair value of the
Company's long-term debt and company-obligated mandatorily redeemable
preferred securities would increase approximately $63.4 million and $46.2
million, respectively. The effect of a change in interest rates on asset
prices is determined using a matrix pricing system whereby all securities are
priced with the resulting market rates and spreads assuming a change of 100
basis points. These hypothetical prices are compared to the actual prices for
the period to compute the overall change in market value. The changes in fair
value of long-term debt and company-obligated mandatorily redeemable preferred
securities are determined using discounted cash flows analyses. Because the
Company actively manages its investments and liabilities, actual changes could
be less than those estimated above.

Foreign Currency Risk

The Company is subject to foreign exchange risk arising from its Canadian
operations and certain Canadian-dollar denominated investment securities.
Assuming a foreign exchange rate decrease of 10% from the December 31, 1998
level, the net hypothetical decrease in stockholders' equity is estimated to
be $34.3 million at December 31, 1998. At December 31, 1998, there were no
outstanding derivatives hedging the foreign currency risk.

29

Investments

Investment activities are an integral part of the Company's business, and
profitability is significantly affected by investment results. Invested assets
are segmented into portfolios, which support the various product lines.
Generally, the investment strategy for the portfolios is to match the
effective asset durations with related expected liability durations and to
maximize investment returns, subject to constraints of quality, liquidity,
diversification, and regulatory considerations. The following table provides
the distribution of invested assets for the years indicated.

December 31
-------------------
1998 1997 1996
----- ----- -----

Investment-Grade Fixed Maturity Securities................. 79.5% 82.2% 77.0%
Below-Investment-Grade Fixed Maturity Securities........... 7.9 6.6 6.7
Equity Securities.......................................... -- 0.1 0.1
Mortgage Loans............................................. 0.1 0.1 --
Real Estate................................................ 0.2 0.4 1.1
Policy Loans............................................... 12.1 10.2 13.1
Other...................................................... 0.2 0.4 2.0
----- ----- -----
Total.................................................... 100.0% 100.0% 100.0%
===== ===== =====

The following table provides certain investment information and results for
the years indicated.

Year Ended December 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(in millions of dollars)

Average Cash and Invested Assets.............. $18,410.6 $17,808.2 $14,056.3
Net Investment Income......................... $ 1,374.0 $ 1,354.7 $ 1,090.1
Average Yield*................................ 7.5% 7.6% 7.8%
Net Realized Investment Gains (Losses)........ $ 34.0 $ 15.1 $ (8.6)

- --------
* Average yield is determined by dividing annualized net investment income by
the average cash and invested assets for the year. Excluding net unrealized
gains on securities, the yield is 8.2%, 8.0%, and 8.1% for 1998, 1997, and
1996, respectively. See "Note 3 of the Notes to Consolidated Financial
Statements."

For the past three years, the Company's exposure to non-current investments
has improved significantly from prior years. These non-current investments are
primarily foreclosed real estate and mortgage loans which became more than
thirty days past due in their principal and interest payments. Non-current
investments totaled $20.5 million at December 31, 1998, or 0.12 percent of
invested assets.

The Company's investment in mortgage-backed securities approximates $2.0
billion on an amortized cost basis at December 31, 1998 and $3.1 billion at
December 31, 1997. At December 31, 1998, the mortgage-backed securities had an
average life of 8.7 years and effective duration of 7.5 years. The mortgage-
backed securities are valued on a monthly basis using valuations supplied by
the brokerage firms that are dealers in these securities. The primary risk
involved in investing in mortgage-backed securities is the uncertainty of the
timing of cash flows from the underlying loans due to prepayment of principal.
The Company uses models which incorporate economic variables and possible
future interest rate scenarios to predict future prepayment rates. The Company
has not invested in mortgage-backed derivatives, such as interest-only,
principal-only or residuals, where market values can be highly volatile
relative to changes in interest rates.

Below-investment-grade bonds are inherently more risky than investment-grade
bonds since the risk of default by the issuer, by definition and as exhibited
by bond rating, is higher. Also, the secondary market for certain below-
investment-grade issues can be highly illiquid. Management does not anticipate
any liquidity problem caused by the investments in below-investment-grade
securities, nor does it expect these investments to adversely affect its
ability to hold its other investments to maturity.

30

The Company's exposure to below-investment-grade fixed maturity securities
at December 31, 1998, was $1,366.4 million, representing 7.9 percent of
invested assets, below the Company's internal limit of 10.0 percent of
invested assets for this type of investment. The Company's exposure to below-
investment-grade fixed maturities totaled $1,297.1 million at December 31,
1997, representing 6.6 percent of invested assets.

Changes in interest rates and individuals' behavior affect the amount and
timing of asset and liability cash flows. Management regularly models and
tests all asset and liability portfolios to improve interest rate risk
management and net yields. Testing the asset and liability portfolios under
various interest rate and economic scenarios allows management to choose the
most appropriate investment strategy as well as to prepare for the most
disadvantageous outcomes.

The Company utilizes forward interest rate swaps, forward treasury
purchases, and options on forward interest rate swaps to manage and increase
yield on cash flows expected from current holdings. All transactions are
hedging in nature and not speculative. Almost all transactions are associated
with the individual disability product portfolio. See "Note 4 of the Notes to
Consolidated Financial Statements" for further discussion.

Year 2000 Issues

As are many other businesses in this country and abroad, the Company is
affected in numerous ways, both by its own computer information systems and by
third parties with which it has business relationships, in the processing of
date data relating to the year 2000 and beyond. Failure to adequately address
and substantially resolve year 2000 issues could, and as to mission critical
systems in certain circumstances would, have a material adverse effect on the
Company's business, results of operations, or financial condition. While there
can be no assurance as to its success, the Company has a project underway
which is intended and designed to avoid and/or mitigate any such material
adverse effect from year 2000 issues.

In 1996 the Company completed the significant aspects of the planning phase
of a project designed to modify its computer information systems to enable
proper processing of date data relating to the year 2000. This project has a
number of phases, including (i) planning; (ii) inventory (ascertaining the
various internal systems and external relationships potentially affected by
year 2000 issues); (iii) analysis (determining the extent to which the system
or remediation or conversion to a compliant alternative); (iv) construction
(remediating the system in order to be compliant); (v) testing (subjecting the
integrated testing to validate interconnected and future date processing in
the date forward year 2000 environment); and (vi) completion. The Company
defines year 2000 "compliant" or "compliance" to mean that software will have
the ability to (i) accept input and provide output of data involving dates or
portions of dates correctly and without ambiguity as to the twentieth or
twenty-first centuries; (ii) manage, store, manipulate, sort, sequence, and
perform calculations with respect to data involving dates or portions of dates
before, during and after January 1, 2000 (including single-century or multi-
century date formulas) without malfunction, abends, aborts; and (iii) manage
the leap year occurring in the year 2000 and any Special Dates. The term
"Special Dates" means dates used by programmers to create exceptions where no
date could be determined as specified to serve as end-of-file indicators or to
facilitate sort routines. The Company's approach has primarily been one of
modifying or remediating systems to make them compliant since there are not
generally compliant replacements available in the market that will meet the
Company's operational needs. In some instances non-compliant systems have been
replaced with available and usable compliant systems where that approach is
both cost and time effective.

In addition, there are different areas of remediation requiring different
solutions. These include the following: (i) business applications (systems
supporting core business processes; this area constitutes more than 75 percent
of the overall project effort), (ii) user developed systems (non-mission
critical systems developed by business areas in the Company for specific
tasks), (iii) hardware and software (computers, central operating systems,
software development, and non-information technology systems; this area
requires contacting vendors as to year 2000 compliance), (iv) enterprise
computing (compliance of the computing infrastructure and year 2000 test
facilities), and (v) business partners (other external business relationships
that have year 2000 compliance issues; this area requires contacting third
parties as to the status of year 2000 compliance). Operational control of the
project is the responsibility of the project office.

31

The following table provides information as to the timeline of phases of
completion of the year 2000 project for different areas of the Company's
business:

Year 2000 Project--Time Line(1)

4Q 1995 1Q 1996 2Q 1996 3Q 1996 4Q 1996
------------ ------------ ------------ ------------- ------------

Business Impact Initial Development Pilot
Applications analysis project plan of applications
completed developed methodology chosen to
validate
methodology
Project Office Corporate
awareness
activities
begin

1Q 1997 2Q 1997 3Q 1997 4Q 1997
------------ ------------- -------------- ------------------------

Business Detail Risk Regression testing
Applications project plan assessments begins
developed performed,
inventory
completed
User Inventory Risk assessments
Developed begins completed
Systems
Hardware and Vendor Vendor Inventory of hardware
Software surveys management and software begins
initiated program
formalized
Enterprise Future date Upgrade of Definition/analysis/work
Computing time machine infrastructure plan development/
environment products construction of in-house
planning begins system applications
begins
Business Awareness
Partners campaign
extends to
responses to
external
inquiries
Project Documentation Project Office Formalized executive and
Office and audit formed board reporting
process
defined

32

Year 2000 Project--Time Line (Continued)(1)

1Q 1998 2Q 1998 3Q 1998 4Q 1998
------------- -------------- --------------- --------------------

Business Construction Full compliance of
Applications completed; business
business applications
applications
begin time
machine
testing
User Systems in Full compliance of
Developed construction user developed
Systems and testing systems
Hardware and Inventory of Standard
Software field office software
third party configuration
service established
providers
Enterprise Time machine Certification Full compliance
Computing environment testing of of home office
constructed computing infrastructure,
at 3 sites infrastructure network and
completed telephony
systems
Business Request for Contingency Contingency Business partner
Partners information planning plans finalized interface testing
sent to process for all
electronic defined for critical
business critical business
partners business interfaces
processes
Project Testing Business impact
Office metrics teams formulated
established
for time
machine

1Q 1999 2Q 1999 3Q 1999 4Q 1999--2000
------------- -------------- --------------- --------------------

Hardware and Contingency plans
Software implemented as
required
Enterprise Upgrade and
Computing replacement of
all PC systems
completed
Business Business Contingency plans
Partners partner implemented as
interface required
testing
completed
Project Enterprise-- "Rollover" Enterprise-- "Rollover" plan
Office wide plan wide executed; business
integration developed, integration and information
testing for including testing for re- systems response
re- response team certification teams in place
certification requirements completed
begins

- --------
(1) With regard to GENEX, a separate operating subsidiary acquired in February
1997, the primary approach to attaining year 2000 compliance will be
replacing non-compliant systems with compliant systems. This process is
expected to be complete in the third quarter of 1999.

33

With the exception of GENEX, as of December 31, 1998, the Company has
completed the compliance testing of its material business systems. Compliance
testing was conducted in an isolated, date-forward environment using the
Company's standard of compliance (see above). In March 1999, the Company will
begin periodically testing its systems in this date-forward environment to
ensure continued compliance into the next century, as well as scheduling
testing of external electronic interfaces with its business partners.

There are numerous instances in which third parties having a relationship
with the Company have year 2000 issues to address and resolve. These include
primarily vendors of hardware and software, holders of group insurance
policies, issuers of investment securities, financial institutions,
governmental agencies, and suppliers. An aspect of the project has been to
identify these third parties and generally to contact them seeking written
assurance as to the third party's expectancy to be year 2000 compliant.
Written requests have been sent to more than 925 third parties. The nature of
the Company's follow up depends upon its assessment of the response and of the
materiality of the effect of non-compliance by the third party on the Company.
For example, the Company follows up with additional written requests and
telephonic inquiries depending upon the circumstances and in some instances
determines that it is appropriate to test third party systems about which it
has received written assurance. Project personnel have identified primary
business areas which, based on the status of current responses from third
parties and their risk assessments, have the potential for year 2000 problems.
In instances in which the effect of non-compliance may be deemed materially
adverse to the Company's business, results of operations, or financial
condition, the project personnel have determined alternatives for contingent
arrangements, and project personnel are considering appropriate documentation
of potential procedural changes by the Company or third party providers. At
this time these include various plans for investments and cash management,
underwriting, client services, workplace management, and claims. With regard
to material relationships, contingency plans are expected to be ready for
execution by the end of second quarter, 1999.

Since inception of the project, the Company has expensed $6.5 million
through December 31, 1998, in connection with incremental cost of the year
2000 project and estimates an additional $1.5 million to complete the project.

The effort of the information systems personnel and others devoted to the
project has been considerable. Temporary personnel in varying numbers have
been retained to assist full time personnel in some phases or aspects of the
project. The Company has utilized compensation programs to retain project
personnel in order to keep the project on schedule. While the project has
required systems management to more closely scrutinize the prioritization of
information technology projects, it is not believed that any deferral of
information technology projects has had a material impact on the Company. At
various stages during the project, the Company has used consultants on some
particular aspects of the project. The Company has also had occasional contact
with certain peer companies comparing approaches to year 2000 issues. The
Company has not sought and does not currently expect to obtain independent
verification of its processes for dealing with year 2000.

Given the range of possibilities that may occur in connection with non-
compliance with year 2000 that could affect the Company, particularly as a
consequence of third parties, the Company is unable to provide an estimate of
the impact of such non-compliance on its business, results of operations, or
financial condition. With regard to non-compliance resulting from the
Company's systems, which the Company believes to be less likely than that
resulting from third parties, the Company would devote its financial and
personnel resources, which include approximately 250 systems personnel who
would be available, to remediate the problem as soon as possible. With regard
to non-compliance resulting from third party failure, the Company is trying to
determine through responses and other appropriate action where there is any
material likelihood of non-compliance having a potentially material impact. In
these instances it is seeking to develop an appropriate contingency
arrangement that will minimize such impact; however, given the range of
possibilities, no assurance can be given that the Company's efforts will be
successful.

The foregoing discussion of the year 2000 issue contains forward-looking
statements relating to such matters as financial performance and the business
of the Company. The Private Securities Litigation Reform Act of 1995 provides
a safe harbor for forward-looking statements. In order for the Company to
comply with the

34

terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience relating to compliance with
year 2000 to differ materially from the anticipated results or other
expectations expressed in the Company's forward looking statements concerning
year 2000 issues, which involve certain risks and uncertainties. These factors
include (i) the unanticipated material impact of a system fault of the Company
relating to year 2000, (ii) the failure to successfully remediate, in spite of
testing, material systems of the Company, (iii) the time it may take to
successfully remediate a failure once it occurs, as well as the resulting
costs and loss of revenues, and (iv) the failure of third parties to properly
remediate material year 2000 problems.

Pending Accounting Standards

See "Note 1 of the Notes to Consolidated Financial Statements" for
information concerning accounting pronouncements outstanding.

Item 8. Financial Statements And Supplementary Data

35

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors and Shareholders
Provident Companies, Inc.

We have audited the accompanying consolidated statements of financial
condition of Provident Companies, Inc. and Subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Provident Companies, Inc. and Subsidiaries at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.

Ernst & Young LLP

Chattanooga, Tennessee
February 9, 1999

36

PROVIDENT COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31
-------------------------
1998 1997
------------ ------------
(in millions of dollars)

ASSETS
Investments
Fixed Maturity Securities
Available-for-Sale--at fair value (amortized
cost: $13,231.6; $15,491.4)..................... $ 14,835.3 $ 17,035.1
Held-to-Maturity--at amortized cost (fair value:
$352.5; $336.6)................................. 307.0 306.8
Equity Securities--at fair value (cost: $2.7;
$11.1)............................................ 2.1 10.0
Mortgage Loans..................................... 17.8 17.8
Real Estate........................................ 43.6 87.1
Policy Loans....................................... 2,089.6 1,983.9
Other Long-term Investments........................ 8.4 22.6
Short-term Investments............................. 28.9 57.5
------------ ------------
Total Investments.............................. 17,332.7 19,520.8

Other Assets
Cash and Bank Deposits................................... 30.7 37.7
Accounts and Premiums Receivable......................... 98.4 166.4
Reinsurance Receivable................................... 3,101.0 987.2
Accrued Investment Income................................ 335.1 363.2
Deferred Policy Acquisition Costs........................ 464.8 362.9
Value of Business Acquired............................... 490.0 560.8
Goodwill................................................. 692.3 732.3
Property and Equipment--at cost less accumulated depreci-
ation................................................... 129.9 109.2
Miscellaneous............................................ 35.5 26.2
Separate Account Assets.................................. 377.7 310.9
--------- ---------
Total Assets......................................... $23,088.1 $23,177.6
========= =========

See notes to consolidated financial statements.

37

PROVIDENT COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)

December 31
-------------------------
1998 1997
------------ ------------
(in millions of dollars)

LIABILITIES AND STOCKHOLDERS' EQUITY
Policy and Contract Benefits......................... $ 513.8 $ 531.2
Reserves for Future Policy and Contract Benefits..... 13,642.5 13,001.1
Unearned Premiums.................................... 186.7 192.7
Experience Rating Refunds............................ 100.0 133.1
Policyholders' Funds................................. 3,127.3 4,194.9
Federal Income Tax Liability
Current............................................ 58.5 40.3
Deferred........................................... 238.2 149.8
Short-term Debt...................................... 39.4 150.7
Long-term Debt....................................... 600.0 725.0
Other Liabilities.................................... 495.5 468.6
Separate Account Liabilities......................... 377.7 310.9
------------ ------------
Total Liabilities.............................. 19,379.6 19,898.3
------------ ------------
Commitments and Contingent Liabilities--Note 15

Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debt Securities of the Company............. 300.0 --
--------- ---------
Stockholders' Equity--Note 10
Preferred Stock........................................ -- 156.2
Common Stock
Authorized: 150,000,000 shares
Issued: 135,744,153 and 135,160,109 shares........... 135.7 135.2
Additional Paid-in Capital............................. 762.0 750.6
Accumulated Other Comprehensive Income................. 685.7 603.6
Retained Earnings...................................... 1,834.3 1,635.2
Treasury Stock--at cost: 241,500 and 40,200 shares..... (9.2) (1.5)
--------- ---------
Total Stockholders' Equity......................... 3,408.5 3,279.3
--------- ---------
Total Liabilities and Stockholders' Equity......... $23,088.1 $23,177.6
========= =========

See notes to consolidated financial statements.

38

PROVIDENT COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(in millions of dollars, except share data)

Revenue
Premium Income............... $ 2,347.4 $ 2,053.7 $ 1,175.7
Net Investment Income........ 1,374.0 1,354.7 1,090.1
Net Realized Investment Gains
(Losses).................... 34.0 15.1 (8.6)
Other Income................. 182.6 129.7 34.7
-------------- -------------- --------------
Total Revenue.............. 3,938.0 3,553.2 2,291.9
-------------- -------------- --------------
Benefits and Expenses
Policy and Contract Bene-
fits........................ 1,805.1 1,687.8 1,216.5
Change in Reserves for Future
Policy and Contract Benefits
and Policyholders' Funds.... 772.1 670.3 444.7
Commissions.................. 330.3 305.7 168.3
Interest and Debt Expense.... 70.0 42.5 17.8
Increase in Deferred Policy
Acquisition Costs........... (90.7) (69.1) (7.4)
Amortization of Value of
Business Acquired and Good-
will........................ 55.0 43.8 0.5
Other Operating Expenses..... 593.4 491.9 225.3
-------------- -------------- --------------
Total Benefits and Ex-
penses.................... 3,535.2 3,172.9 2,065.7
-------------- -------------- --------------
Income Before Federal Income
Taxes......................... 402.8 380.3 226.2
Federal Income Taxes........... 148.8 133.0 80.6
-------------- -------------- --------------
Net Income..................... $ 254.0 $ 247.3 $ 145.6
============== ============== ==============

Earnings Per Common Share--Ba-
sic........................... $ 1.87 $ 1.88 $ 1.46
Earnings Per Common Share--As-
suming Dilution............... $ 1.82 $ 1.84 $ 1.44

See notes to consolidated financial statements.

39

PROVIDENT COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Accumulated
Additional Other
Preferred Common Paid-in Comprehensive Retained Treasury
Stock Stock Capital Income Earnings Stock Total
--------- ------ ---------- ------------- -------- -------- --------
(in millions of dollars)

Balance at December 31,
1995................... $156.2 $ 45.4 $ 5.8 $ 97.1 $1,347.8 $ -- $1,652.3
Comprehensive Income,
Net of Tax:
Net Income............. 145.6 145.6
Change in Net
Unrealized Gain on
Securities............ (11.0) (11.0)
Change in Foreign
Currency Translation
Adjustment............ (0.4) (0.4)
--------
Total Comprehensive
Income................ 134.2
--------
Shares Issued.......... 0.2 5.6 5.8
Dividends to
Stockholders.......... (53.7) (53.7)
------ ------ ------ ------ -------- ----- --------
Balance at December 31,
1996................... 156.2 45.6 11.4 85.7 1,439.7 -- 1,738.6
Comprehensive Income,
Net of Tax:
Net Income............. 247.3 247.3
Change in Net
Unrealized Gain on
Securities............ 533.4 533.4
Change in Foreign
Currency Translation
Adjustment............ (15.5) (15.5)
--------
Total Comprehensive
Income................ 765.2
--------
Shares Issued.......... 22.1 806.7 828.8
Two-for-One Stock
Split................. 67.5 (67.5) --
Shares Purchased....... (1.5) (1.5)
Dividends to
Stockholders.......... (51.8) (51.8)
------ ------ ------ ------ -------- ----- --------
Balance at December 31,
1997................... 156.2 135.2 750.6 603.6 1,635.2 (1.5) 3,279.3
Comprehensive Income,
Net of Tax:
Net Income............. 254.0 254.0
Change in Net
Unrealized Gain on
Securities............ 96.7 96.7
Change in Foreign
Currency Translation
Adjustment............ (14.6) (14.6)
--------
Total Comprehensive
Income................ 336.1
--------
Shares Issued.......... 0.5 11.4 11.9
Shares Purchased....... (7.7) (7.7)
Shares Redeemed........ (156.2) (156.2)
Dividends to
Stockholders.......... (54.9) (54.9)
------ ------ ------ ------ -------- ----- --------
Balance at December 31,
1998................... $ -- $135.7 $762.0 $685.7 $1,834.3 $(9.2) $3,408.5
====== ====== ====== ====== ======== ===== ========

See notes to consolidated financial statements.

40

PROVIDENT COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

Cash Flows from Operating Activities
Net Income...................................... $ 254.0 $ 247.3 $ 145.6
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Policy Acquisition Costs Capitalized.......... (170.6) (143.5) (71.4)
Amortization of Policy Acquisition Costs...... 79.9 74.4 64.0
Amortization of Value of Business Acquired and
Goodwill..................................... 55.0 43.8 0.5
Depreciation.................................. 18.3 20.7 10.6
Net Realized Investment (Gains) Losses........ (34.0) (15.1) 8.6
Accretion of Bond Discount.................... (83.8) (45.4) (8.4)
Reinsurance Receivable........................ 278.9 44.4 (33.0)
Accrued Investment Income..................... (7.4) (10.7) 9.1
Insurance Reserves and Liabilities............ 495.3 595.8 546.8
Federal Income Taxes.......................... 71.0 23.5 (11.9)
Other......................................... (40.3) (8.2) 0.1
-------- -------- --------
Net Cash Provided by Operating Activities........ 916.3 827.0 660.6
-------- -------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Investments
Available-for-Sale Securities.................. 1,402.3 1,872.6 1,592.6
Other Investments.............................. 59.8 92.9 141.8
Proceeds from Maturities of Investments
Available-for-Sale Securities.................. 1,107.7 1,170.5 1,115.7
Held-to-Maturity Securities.................... 0.5 1.1 100.5
Other Investments.............................. 5.7 295.9 13.0
Purchase of Investments
Available-for-Sale Securities.................. (2,292.2) (2,904.3) (1,630.7)
Held-to-Maturity Securities.................... (1.9) (23.4) (48.6)
Other Investments.............................. (158.3) (180.5) (177.5)
Net (Purchases) Sales of Short-term
Investments.................................... 23.8 393.1 (21.5)
Acquisition of Business......................... -- (860.3) --
Disposition of Business......................... 58.0 -- --
Other........................................... (32.2) (19.2) (75.5)
-------- -------- --------
Net Cash Provided (Used) by Investing
Activities...................................... 173.2 (161.6) 1,009.8
-------- -------- --------
Cash Flows from Financing Activities
Deposits to Policyholder Accounts............... 83.6 528.7 392.5
Maturities and Benefit Payments from
Policyholder Accounts.......................... (1,033.5) (2,081.9) (2,023.8)
Net Short-term Debt Borrowings (Repayments)..... (111.3) 150.7 (1.4)
Issuance of Long-term Debt...................... 600.0 725.0 200.0
Long-term Debt Repayments....................... (725.0) (299.1) (200.0)
Issuance of Company-Obligated Mandatorily
Redeemable Preferred Securities................ 300.0 -- --
Redemption of Preferred Stock................... (156.2) -- --
Issuance of Common Stock........................ 11.9 389.8 5.8
Dividends Paid to Stockholders.................. (58.1) (60.0) (45.5)
Other........................................... (7.7) 0.5 (3.5)
-------- -------- --------
Net Cash Used by Financing Activities............ (1,096.3) (646.3) (1,675.9)
-------- -------- --------
Effect of Foreign Exchange Rate Changes on Cash.. (0.2) (0.7) --
-------- -------- --------
Net Increase (Decrease) in Cash and Bank
Deposits........................................ (7.0) 18.4 (5.5)
Cash and Bank Deposits at Beginning of Year...... 37.7 19.3 24.8
-------- -------- --------
Cash and Bank Deposits at End of Year............ $ 30.7 $ 37.7 $ 19.3
======== ======== ========

See notes to consolidated financial statements

41

PROVIDENT COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1--Significant Accounting Policies

Basis of Presentation: The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles. Such
accounting principles differ from statutory accounting practices prescribed or
permitted by state regulatory authorities (see Note 16). The consolidated
financial statements include the accounts of Provident Companies, Inc. and its
wholly-owned subsidiaries (the Company). Material intercompany transactions
have been eliminated. Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the 1998 presentation.

Operations: The Company does business in the United States and Canada. The
Company operates principally in the life and health insurance business.
Individual disability and life products are reported in the Individual segment
and are marketed primarily through brokerage offices, independent agents,
financial planners, and corporate marketing arrangements. The Employee
Benefits segment contains products that are sold to corporate customers,
including group life, disability, and accidental death and dismemberment
protection. Individual products marketed through sponsoring employers are
reported in the Voluntary Benefits segment. The Other segment includes results
from products no longer actively marketed, including corporate-owned life
insurance, group pension, medical stop-loss, medical and dental, and
individual annuities. The Corporate segment reports corporate results,
primarily investment earnings not specifically allocated to a line of
business, corporate interest expense, goodwill amortization, and certain
corporate expenses not allocated to a line of business. The operating segment
information located in the tables on pages 18 through 25 is incorporated
herein by reference.

Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future
as more information becomes known, which could impact the amounts reported and
disclosed herein.

Investments: Investments are reported in the consolidated statements of
financial condition as follows:

Available-for-Sale Fixed Maturity Securities are reported at fair value.

Held-to-Maturity Fixed Maturity Securities are generally reported at
amortized cost.

Equity Securities are reported at fair value.

Mortgage Loans are carried at the fair value of collateral.

Real Estate that the Company expects to hold and use is carried at cost less
accumulated depreciation which is calculated using principally the straight-
line method. Real estate to be disposed of is carried at the lower of cost
less accumulated depreciation or fair value less cost to sell. Accumulated
depreciation on real estate was $10.2 million and $23.3 million as of December
31, 1998 and 1997, respectively.

Policy Loans are presented at unpaid balances.

Other Long-term Investments are carried at cost plus the Company's equity in
undistributed net earnings since acquisition.

Short-term Investments are carried at cost.

Fixed maturity securities include bonds and redeemable preferred stocks.
Equity securities include common stocks and nonredeemable preferred stocks.
Fixed maturity and equity securities not bought and held for the purpose of
selling in the near term but for which the Company does not have the positive
intent and ability to

42

hold to maturity are classified as available-for-sale. Fixed maturity
securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity. The Company determines the
appropriate classification of fixed maturity securities at the time of
purchase.

Changes in the fair value of available-for-sale fixed maturity securities
and equity securities are reported as other comprehensive income. These
amounts are net of deferred federal income taxes and valuation adjustments to
deferred policy acquisition costs, value of business acquired, and reserves
for future policy and contract benefits which would have been recorded had the
related unrealized gains or losses on these securities been realized.

Realized investment gains and losses, which are reported as a component of
revenue in the consolidated statements of income, are based upon specific
identification of the investments sold and do not include amounts allocable to
separate accounts. At the time a decline in the value of an investment is
determined to be other than temporary, a loss is recorded which is included in
realized investment gains and losses.

Derivative Financial Instruments:

Interest Rate Swap Agreements are agreements in which two parties agree to
exchange, at specified intervals, interest payment streams calculated on an
agreed-upon notional principal amount with at least one stream based on a
specified variable rate. The underlying notional principal is not exchanged
between the parties. The Company has certain forward interest rate swap
agreements where the exchange of interest payments does not begin until a
specified future date. The Company intends to settle the forward interest rate
swap agreements prior to the commencement of the exchange of interest payment
streams.

The fair values of interest rate swap agreements which hedge available-for-
sale securities are reported in the consolidated statements of financial
condition as a component of fixed maturity securities. The fair values of
interest rate swap agreements which hedge liabilities are not reported in the
consolidated statements of financial condition. Amounts to be paid or received
pursuant to interest rate swap agreements are accrued and recognized in the
consolidated statements of income as an adjustment to net investment income
for asset hedges or as an adjustment to policy and contract benefits for
liability hedges.

The Company accounts for all of its interest rate swap agreements as hedges.
Accordingly, any gains or losses realized on closed or terminated interest
rate swap agreements are deferred and amortized to net investment income for
asset hedges or policy and contract benefits for liability hedges over the
expected remaining life of the hedged item. If the hedged item matures or
terminates earlier than anticipated, the remaining unamortized gain or loss is
amortized to net investment income or policy and contract benefits in the
current period. If the hedged asset is disposed, the remaining unamortized
gain or loss is recognized as an adjustment to net realized investment gains
and losses. Gains or losses realized on interest rate swap agreements which
are terminated when the hedged assets are sold or which are terminated because
the hedged anticipated transaction is no longer likely to occur are reported
in the consolidated statements of income as a component of net realized
investment gains and losses. The Company regularly monitors the effectiveness
of its hedging programs. In the event a hedge becomes ineffective, it is
marked-to-market, resulting in a charge or credit to net investment income or
policy and contract benefits.

Futures and Forward Contracts are commitments to either purchase or sell a
financial instrument at a specific future date for a specified price. The
Company invests only in futures and forward contracts which have U.S. Treasury
securities as the underlying investments. Changes in the market value of
contracts are generally settled on a daily basis. The notional amounts of
futures and forward contracts represent the extent of the Company's
involvement but not the future cash requirements, as the Company intends to
close out open positions prior to settlement. All of the Company's futures and
forward contracts are accounted for as hedges.

The fair values of futures and forwards which hedge available-for-sale
securities are reported in the consolidated statements of financial condition
as a component of fixed maturity securities. The fair values of open futures
and forwards which hedge liabilities are reported in the consolidated
statements of financial

43

condition as a component of other liabilities. Gains or losses realized on the
termination of futures and forward contracts are accounted for in the same
manner as interest rate swap agreements.

Option Contracts give the owner the right, but not the obligation, to buy or
sell a financial instrument at an agreed-upon price on or before a specific
date. The purchasing counterparty pays a premium to the selling counterparty
for this right. The notional amounts of contracts represent the Company's
involvement but not the future cash requirements, as the Company intends to
close out contracts prior to the expiration date when the market price of the
underlying financial instrument exceeds the option price or allow contracts to
expire if the option price exceeds the market price. All of the Company's
option contracts are accounted for as hedges. The book and fair values of
option contracts are reported in the statements of financial condition in a
manner similar to the underlying hedged item. Gains or losses on the
termination of option contracts are accounted for in the same manner as
interest rate swap agreements.

Deferred Policy Acquisition Costs: Certain costs of acquiring new business
which vary with and are primarily related to the production of new business
have been deferred. Such costs include commissions, other agency compensation,
certain selection and policy issue expenses, and certain field expenses.
Deferred policy acquisition costs are subject to recoverability testing at the
time of policy issue and loss recognition testing subsequent to the year of
issue.

Deferred policy acquisition costs related to traditional policies are
amortized over the premium paying period of the related policies in proportion
to the ratio of the present value of annual expected premium income to the
present value of total expected premium income. Adjustments are made each year
to recognize actual persistency experience as compared to assumed experience.

Deferred policy acquisition costs related to interest-sensitive policies are
amortized over the lives of the policies in relation to the present value of
estimated gross profits from surrender charges and mortality, investment, and
expense margins. Adjustments are made each year to reflect actual experience
for assumptions which deviate significantly compared to assumed experience.

Loss recognition is performed when, in the judgment of management, adverse
deviations from original assumptions have occurred and may be likely to
continue such that recoverability of deferred policy acquisition costs on a
line of business is questionable. Insurance contracts are grouped on a basis
consistent with the Company's manner of acquiring, servicing, and measuring
profitability of the contracts. If loss recognition testing indicates that
deferred policy acquisition costs are not recoverable, the deficiency is
charged to expense. Once a loss recognition adjustment is required, loss
recognition testing is generally performed on an annual basis using then
current assumptions until the line of business becomes immaterial or results
improve significantly. The assumptions used in loss recognition testing
represent management's best estimates of future experience.

Value of Business Acquired: Value of business acquired represents the
present value of future profits recorded in connection with the acquisition of
a block of insurance policies. The asset is amortized based upon expected
future premium income for traditional insurance policies and estimated future
gross profits for interest-sensitive insurance policies, with the accrual of
interest added to the unamortized balance at interest rates ranging from 5.55%
to 7.60%. The Company periodically reviews the carrying amount of value of
business acquired using the same methods used to evaluate deferred policy
acquisition costs.

Goodwill: Goodwill is the excess of the amount paid to acquire a business
over the fair value of the net assets acquired. Goodwill is amortized on a
straight-line basis over a period not to exceed 40 years. The accumulated
amortization for goodwill was $33.6 million and $12.6 million as of December
31, 1998 and 1997, respectively. The carrying amount of goodwill is regularly
reviewed for indicators of impairment in value.

Property and Equipment: Property and equipment is depreciated on the
straight-line method over its estimated useful life. The accumulated
depreciation for property and equipment was $128.8 million and $115.7 million
as of December 31, 1998 and 1997, respectively.

44

Revenue Recognition: Traditional life and accident and health products are
long duration contracts, and premium income is recognized as revenue when due
from policyholders. If the contracts are experience rated, the estimated
ultimate premium is recognized as revenue over the period of the contract. The
estimated ultimate premium, which is revised to reflect current experience, is
based on estimated claim costs, expenses, and profit margins. For interest-
sensitive products, the amounts collected from policyholders are considered
deposits, and only the deductions during the period for cost of insurance,
policy administration, and surrenders are included in revenue. Policyholders'
funds represent funds deposited by contract holders and are not included in
revenue.

Policy and Contract Benefits: Policy and contract benefits, principally
related to accident and health insurance policies, are based on reported
losses and estimates of incurred but not reported losses for traditional life
and accident and health products. For interest-sensitive products, benefits
are the amounts paid and expected to be paid on insured claims in excess of
the policyholders' policy fund balances.

Reserves for Future Policy and Contract Benefits: Active life reserves for
future policy and contract benefits on traditional life and accident and
health products have been provided on the net level premium method. The
reserves are calculated based upon assumptions as to interest, withdrawal,
morbidity, and mortality that were appropriate at the date of issue.
Withdrawal assumptions are based on actual Company experience. Morbidity and
mortality assumptions are based upon industry standards adjusted as
appropriate to reflect actual Company experience. The assumptions vary by
plan, year of issue, and policy duration and include a provision for adverse
deviation.

Disabled lives reserves for future policy and contract benefits on
disability income policies are calculated based upon assumptions as to
interest and claim termination rates that are currently appropriate. The
interest rate assumptions used for discounting claim reserves are based on
projected portfolio yield rates, after consideration for defaults and
investment expenses, for the assets supporting the liabilities for the various
product lines. The assets for each product line are selected according to the
specific investment strategy for that product line to produce asset cash flows
that follow similar timing and amount patterns to those of the anticipated
liability payments. Claim termination rate assumptions are based upon industry
standards adjusted as appropriate to reflect actual Company experience. The
assumptions vary by year of claim incurral and may include a provision for
adverse deviation.

Reserves for future policy and contract benefits on group single premium
annuities have been provided on a net single premium method. The reserves are
calculated based upon assumptions as to interest, mortality, and retirement
that were appropriate at the date of issue. Mortality assumptions are based
upon industry standards adjusted as appropriate to reflect actual Company
experience. The assumptions vary by year of issue and include a provision for
adverse deviation.

The interest rate assumptions used to calculate reserves for future policy
and contract benefits are as follows:

December 31
------------------------------
1998 1997
-------------- ---------------

Active Life Reserves--Current Year Issues
Traditional Life.............................. 6.75% to 8.75% 7.25% to 10.00%
Individual Disability Income.................. 6.45% to 7.50% 7.00% to 7.75%
Disabled Lives Reserves--Current Year Claims
Individual Disability Income.................. 7.75% to 8.00% 7.75% to 8.00%
Group Disability Income....................... 7.40% to 7.60% 6.50% to 8.00%
Disabled Lives Reserves--Prior Year Claims
Individual Disability Income.................. 7.75% to 8.00% 7.75% to 8.00%
Group Disability Income....................... 7.40% to 7.60% 3.90% to 8.90%

45

Interest assumptions for active life reserves are generally graded downward
over a period of years. Reserves for future policy and contract benefits on
interest-sensitive products are principally policyholder account values
determined on the retrospective deposit method.

Policyholders' Funds: Policyholders' funds represent customer deposits plus
interest credited at contract rates. The Company controls its interest rate
risk by investing in quality assets which have an aggregate duration that
closely matches the expected duration of the liabilities. For guaranteed
investment contracts (GICs), which are no longer marketed, the Company uses a
cash flow matching investment strategy.

Federal Income Taxes: Deferred taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and the amounts used for income tax purposes.
Deferred taxes have been measured using enacted statutory income tax rates and
laws that are currently in effect.

Separate Accounts: The separate account amounts shown in the accompanying
financial statements represent contributions by contract holders to variable-
benefits and fixed-benefits pension plans. The contract purchase payments and
the assets of the separate accounts are segregated from other Company funds
for both investment and administrative purposes. Contract purchase payments
received under variable annuity contracts are subject to deductions for sales
and administrative fees. Also, the sponsoring company of the separate accounts
receives management fees which are based on the net asset values of the
separate accounts.

Translation of Foreign Currency: Revenues and expenses of the Company's
Canadian operations are translated at average exchange rates. Assets and
liabilities are translated at the rate of exchange on the balance sheet date.
The translation gain or loss is generally reported in accumulated other
comprehensive income, net of deferred tax.

Changes in Accounting Principles:

Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting
Comprehensive Income. In 1998, the Company adopted the provisions of SFAS 130
which establish standards for reporting and presentation of comprehensive
income and its components. SFAS 130 requires foreign currency translation
adjustments and unrealized holding gains and losses on the Company's
available-for-sale fixed maturity and equity securities, which prior to
adoption were reported separately in stockholders' equity, to be reported as
components of comprehensive income (see Note 10). Prior periods have been
reclassified to conform to the requirements of SFAS 130. The adoption of SFAS
130 had no impact on the Company's net income or stockholders' equity.

Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures
about Segments of an Enterprise and Related Information. In 1998, the Company
adopted the provisions of SFAS 131 which establish standards for reporting
information for segments of a business enterprise. See operating segment
information located in the tables on pages 18 through 25. The adoption of SFAS
131 did not have an effect on the Company's financial position or results of
operations.

Statement of Financial Accounting Standards No. 132 (SFAS 132), Employers'
Disclosures about Pensions and Other Postretirement Benefits. In 1998, the
Company adopted the provisions of SFAS 132 which revise employers' disclosures
about pension and other postretirement benefit plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures required by Statements of
Financial Accounting Standards No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. Disclosures for prior periods
have been restated for comparative

46

purposes (see Note 9). The adoption of SFAS 132 had no effect on the Company's
financial position or results of operations.

Statement of Financial Accounting Standards No. 125 (SFAS 125), Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. In 1997, the Company adopted the provisions of SFAS 125 which
provide accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards are based
on consistent application of a financial-components approach that focuses on
control. SFAS 125 also establishes new rules for determining whether a
transfer of financial assets constitutes a sale and, if so, the determination
of any resulting gain or loss. The adoption of SFAS 125 did not have a
material effect on the Company's financial position or results of operations.

Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per
Share. In 1997, the Company adopted the provisions of SFAS 128 which establish
computation and reporting standards for earnings per share. SFAS 128
simplifies the standards for computing earnings per share and makes them
comparable to international earnings per share standards. SFAS 128 requires
dual presentation on the face of the income statement of earnings per share
and earnings per share assuming dilution and requires a reconciliation of the
numerator and denominator of the earnings per share computation to the
numerator and denominator of the earnings per share assuming dilution
computation (see Note 10). Earnings per share is computed using the weighted
average number of common shares outstanding and does not consider any
potential dilution. Earnings per share assuming dilution reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Historical earnings per common share amounts have been restated in accordance
with the provisions of SFAS 128.

Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting
for Stock-Based Compensation. SFAS 123 defines a fair value based method of
accounting for stock-based employee compensation plans. Under this method,
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, which is usually the vesting
period. SFAS 123 also allows an entity to continue to measure compensation
cost using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 (Opinion 25), Accounting for Stock
Issued to Employees. Under this method, compensation cost is the excess, if
any, of the quoted market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the stock.
The Company adopted the provisions of SFAS 123 in 1996 (see Note 11), but
elected to continue to measure compensation cost for stock-based compensation
under the expense recognition provisions of Opinion 25. The adoption of SFAS
123, therefore, did not have an effect on the Company's financial position or
results of operations.

Accounting Pronouncements Outstanding:

Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting
for Derivative Instruments and Hedging Activities. In 1998, the Financial
Accounting Standards Board issued SFAS 133 which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. SFAS 133 specifies a
special method of accounting for certain hedging transactions, prescribes the
type of items and transactions that may be hedged, and provides the criteria
which must be met in order to qualify for hedge accounting.

The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation as follows:

Fair value hedge. Changes in the fair value of both the derivative and the
hedged item attributable to the risk being hedged are recognized in income.

47

Cash flow hedge. To the extent it is effective, changes in the fair value of
the derivative are recognized as a component of accumulated other
comprehensive income in stockholders' equity until the hedged item affects
earnings. Any ineffective portion must be recognized in income at the same
time the change in fair value is recognized on the statement of financial
condition.

Foreign currency exposures hedge. In a hedge of foreign currency exposures
in a net investment in a foreign operation, to the extent the hedge is
effective, the change in the fair value of the derivative is treated as a
translation gain or loss and recognized in accumulated other comprehensive
income offsetting other translation gains and losses arising in consolidation.
Any ineffective portion must be recognized in income at the same time the
change in fair value of the derivative is recognized on the statement of
financial condition.

For a derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.

The Company plans to adopt the provisions of SFAS 133 in 2000. At this time,
the Company has not determined the effects that adoption of SFAS 133 will have
on its financial statements.

Statement of Position 98-1 (SOP 98-1), Accounting for the Costs of Computer
Software Developed for or Obtained for Internal Use. In 1998, the American
Institute of Certified Public Accountants (AICPA) issued SOP 98-1 which
requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use. SOP 98-1 is to be applied
prospectively from the date of adoption. At this time, the effects that the
adoption of SOP 98-1 will have on the Company's financial statements have not
been determined. The Company will adopt the provisions of SOP 98-1 effective
January 1, 1999.

Statement of Position 97-3 (SOP 97-3), Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments. In 1997, the AICPA issued SOP
97-3 which provides guidance for determining when an entity should recognize a
liability or an asset for insurance-related assessments and how to measure
these items. The adoption of SOP 97-3 will not have a material effect on the
Company's financial position or results of operations. The Company will adopt
the provisions of SOP 97-3 effective January 1, 1999.

48

Note 2--Fair Values of Financial Instruments

The carrying amounts and fair values of the Company's financial instruments
are as follows:

December 31
------------------------------------------
1998 1997
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
(in millions of dollars)

Assets
Fixed Maturity Securities
Available-for-Sale.............. $14,641.3 $14,641.3 $16,901.3 $16,901.3
Derivatives Hedging Available-
for-Sale....................... 194.0 194.0 133.8 133.8
Held-to-Maturity................ 307.0 352.5 306.8 336.6
Equity Securities................. 2.1 2.1 10.0 10.0
Mortgage Loans.................... 17.8 17.8 17.8 17.8
Policy Loans...................... 2,089.6 2,234.0 1,983.9 2,376.1
Short-term Investments............ 28.9 28.9 57.5 57.5
Cash and Bank Deposits............ 30.7 30.7 37.7 37.7
Liabilities
Policyholders' Funds
GICs............................ 656.8 671.0 1,603.6 1,618.5
Deferred Annuity Products....... 2,166.2 2,166.2 2,321.0 2,281.0
Supplementary Contracts without
Life Contingencies............. 104.5 104.5 86.7 86.7
Short-term Debt................... 39.4 39.4 150.7 150.7
Long-term Debt.................... 600.0 617.5 725.0 725.0
Company-Obligated Mandatorily
Redeemable Preferred Securities.. 300.0 312.4 -- --
Derivatives Hedging Liabilities... (4.2) (4.2) (7.4) (7.7)

The following methods and assumptions were used by the Company in estimating
the fair values of its financial instruments:

Fixed Maturity Securities: Fair values for fixed maturity securities are
based on quoted market prices, where available. For fixed maturity securities
not actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of the investments.
See Note 3 for the amortized cost and fair values of securities by security
type and by maturity date.

Equity Securities: Fair values for equity securities are based on quoted
market prices.

Mortgage Loans: Fair values for mortgage loans are based on estimated sales
prices at the balance sheet date.

Policy Loans: Fair values for policy loans are estimated using discounted
cash flow analyses, using interest rates currently being offered.

Short-term Investments and Cash and Bank Deposits: Carrying amounts for
short-term investments and cash and bank deposits approximate fair value.

Policyholders' Funds: Fair values for GICs are estimated using discounted
cash flow calculations, based on current market interest rates available for
similar contracts with maturities consistent with those remaining for the
contracts being valued. At December 31, 1998, the carrying amounts for
deferred annuity products

49

approximate fair value due to the assumption of business in 1998 as discussed
in Note 14. At December 31, 1997, fair values for deferred annuity products
are estimated using the cash surrender values of the annuity contracts. The
carrying amounts for supplementary contracts without life contingencies
approximate fair value.

Fair values for insurance contracts other than investment contracts are not
required to be disclosed. However, the fair values of liabilities under all
insurance contracts are taken into consideration in the Company's overall
management of interest rate risk, which minimizes exposure to changing
interest rates through the matching of investment maturities with amounts due
under insurance contracts.

Short-term Debt: The carrying amounts for short-term debt approximate fair
value.

Long-term Debt and Company-Obligated Mandatorily Redeemable Preferred
Securities: Fair values for long-term debt and company-obligated mandatorily
redeemable preferred securities were obtained from independent pricing
services.

Derivatives: Fair values of derivative financial instruments are based on
market quotes or pricing models and represent the net amount of cash the
Company would have received or paid if the contracts had been settled or
closed on December 31.

Note 3--Investments

Securities

The amortized cost and fair values of securities by security type are as
follows:

December 31, 1998
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in millions of dollars)

Available-for-Sale Securities
United States Government and
Government Agencies and
Authorities....................... $ 226.6 $ 72.3 $ -- $ 298.9
States, Municipalities, and
Political Subdivisions............ 14.8 1.3 -- 16.1
Foreign Governments................ 526.4 150.0 0.1 676.3
Public Utilities................... 2,405.7 325.5 11.6 2,719.6
Mortgage-backed Securities......... 1,674.6 141.5 0.4 1,815.7
All Other Corporate Bonds.......... 8,237.3 1,027.4 119.0 9,145.7
Redeemable Preferred Stocks........ 146.2 27.6 10.8 163.0
--------- -------- ------ ---------
Total Fixed Maturity Securities.. 13,231.6 1,745.6 141.9 14,835.3
Equity Securities.................. 2.7 0.1 0.7 2.1
--------- -------- ------ ---------
$13,234.3 $1,745.7 $142.6 $14,837.4
========= ======== ====== =========
Held-to-Maturity Securities
United States Government and
Government Agencies and
Authorities....................... $ 13.5 $ 3.9 $ -- $ 17.4
States, Municipalities, and
Political Subdivisions............ 2.4 0.2 -- 2.6
Mortgage-backed Securities......... 276.1 35.4 -- 311.5
All Other Corporate Bonds.......... 15.0 6.0 -- 21.0
--------- -------- ------ ---------
$ 307.0 $ 45.5 $ -- $ 352.5
========= ======== ====== =========

50

December 31, 1997
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in millions of dollars)

Available-for-Sale Securities
United States Government and
Government Agencies and
Authorities....................... $ 336.6 $ 62.9 $ -- $ 399.5
States, Municipalities, and
Political Subdivisions............ 13.6 1.2 -- 14.8
Foreign Governments................ 526.3 109.9 -- 636.2
Public Utilities................... 2,586.4 284.9 3.6 2,867.7
Mortgage-backed Securities......... 2,841.8 136.2 6.4 2,971.6
All Other Corporate Bonds.......... 9,052.4 963.0 16.8 9,998.6
Redeemable Preferred Stocks........ 134.3 14.7 2.3 146.7
--------- -------- ----- ---------
Total Fixed Maturity Securities.. 15,491.4 1,572.8 29.1 17,035.1
Equity Securities.................. 11.1 0.2 1.3 10.0
--------- -------- ----- ---------
$15,502.5 $1,573.0 $30.4 $17,045.1
========= ======== ===== =========
Held-to-Maturity Securities
United States Government and
Government Agencies and
Authorities....................... $ 13.1 $ 2.6 $ -- $ 15.7
States, Municipalities, and
Political Subdivisions............ 2.9 0.2 -- 3.1
Mortgage-backed Securities......... 276.9 23.7 -- 300.6
All Other Corporate Bonds.......... 13.9 3.3 -- 17.2
--------- -------- ----- ---------
$ 306.8 $ 29.8 $ -- $ 336.6
========= ======== ===== =========

The amortized cost and fair values of fixed maturity securities by maturity
date are shown below. The maturity dates have not been adjusted for possible
calls or prepayments.

December 31, 1998
-------------------------
Amortized Fair
Cost Value
-------------------------
(in millions of dollars)

Available-for-Sale Securities
1 year or less..................................... $ 165.3 $ 237.4
Over 1 year through 5 years........................ 794.8 971.9
Over 5 years through 10 years...................... 2,282.1 2,394.1
Over 10 years...................................... 8,314.8 9,416.2
------------ ------------
11,557.0 13,019.6
Mortgage-backed Securities......................... 1,674.6 1,815.7
------------ ------------
$ 13,231.6 $ 14,835.3
============ ============
Held-to-Maturity Securities
1 year or less..................................... $ 0.2 $ 0.3
Over 1 year through 5 years........................ 1.4 1.4
Over 5 years through 10 years...................... 0.2 0.3
Over 10 years...................................... 29.1 39.0
------------ ------------
30.9 41.0
Mortgage-backed Securities......................... 276.1 311.5
------------ ------------
$ 307.0 $ 352.5
============ ============

51

At December 31, 1998, the total investment in below-investment-grade fixed
maturity securities (securities rated below Baa3 by Moody's Investors Service
or an equivalent internal rating) was $1,366.4 million or 7.9 percent of
invested assets. The amortized cost of these securities was $1,376.9 million.

Net Investment Income

Sources for net investment income are as follows:

Year Ended December 31
--------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

Fixed Maturity Securities........................... $1,166.6 $1,120.7 $ 900.2
Equity Securities................................... 0.4 0.4 0.4
Mortgage Loans...................................... 1.4 10.5 2.6
Real Estate......................................... 7.6 17.4 25.8
Policy Loans........................................ 198.2 192.0 182.8
Other Long-term Investments......................... 9.7 24.5 3.9
Short-term Investments.............................. 40.1 13.6 7.4
-------- -------- --------
Gross Investment Income........................... 1,424.0 1,379.1 1,123.1
Investment Expenses................................. 50.0 24.4 33.0
-------- -------- --------
Net Investment Income............................. $1,374.0 $1,354.7 $1,090.1
======== ======== ========

Realized Investment Gains and Losses

Realized investment gains (losses) are as follows:

Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

Fixed Maturity Securities:
Gross Gains.................................... $ 52.4 $ 63.7 $ 50.1
Gross Losses................................... (13.3) (45.6) (13.0)
Equity Securities................................ 4.1 (0.1) (1.3)
Mortgage Loans and Real Estate................... (10.2) 1.0 (3.7)
Other Invested Assets............................ 0.6 (0.7) 0.1
Derivatives...................................... 0.4 (3.2) (40.8)
-------- -------- --------
$ 34.0 $ 15.1 $ (8.6)
======== ======== ========

Note 4--Derivative Financial Instruments

The Company uses interest rate swaps, interest rate forward contracts,
exchange-traded interest rate futures contracts, and options to hedge interest
rate risks and to match assets with its insurance liabilities.

Derivative Risks

The basic types of risks associated with derivatives are market risk (that
the value of the derivative will be adversely impacted by changes in the
market, primarily the change in interest rates) and credit risk (that the
counterparty will not perform according to the terms of the contract). The
market risk of the derivatives should generally offset the market risk
associated with the hedged financial instrument or liability.

To help limit the credit exposure of the derivatives, the Company has
entered into master netting agreements with its counterparties whereby
contracts in a gain position can be offset against contracts in a loss
position. The Company also typically enters into bilateral, cross-
collateralization agreements with its counterparties to help limit the credit
exposure of the derivatives. These agreements require the counterparty in a
loss position to submit

52

acceptable collateral with the other counterparty in the event the net loss
position meets or exceeds an agreed upon amount. The Company's current credit
exposure on derivatives, which is limited to the value of those contracts in a
net gain position, was $51.3 million at December 31, 1998.

Hedging Activity

The table below summarizes by notional amounts the activity for each
category of derivatives.

Interest Rate Swaps
----------------------
Receive Receive
Variable/ Fixed/
Pay Fixed Pay Variable Forwards Futures Options Total
--------- ------------ -------- -------- -------- --------
(in millions of dollars)

Balance at December 31,
1995................... $900.0 $ 861.2 $ -- $ 15.0 $ -- $1,776.2
Additions............. -- 400.0 -- 477.0 -- 877.0
Terminations.......... 600.0 463.6 -- 482.0 -- 1,545.6
------ -------- ------ -------- -------- --------
Balance at December 31,
1996................... 300.0 797.6 -- 10.0 -- 1,107.6
Acquisition of
Business--Note 13.... -- 9.4 390.0 -- -- 399.4
Additions............. -- 420.0 -- 1,257.3 2,034.5 3,711.8
Terminations.......... 300.0 114.6 250.0 823.8 1,625.0 3,113.4
------ -------- ------ -------- -------- --------
Balance at December 31,
1997................... -- 1,112.4 140.0 443.5 409.5 2,105.4
Additions............. -- 90.0 -- 134.0 207.8 431.8
Terminations.......... -- 122.4 140.0 577.5 405.0 1,244.9
------ -------- ------ -------- -------- --------
Balance at December 31,
1998................... $ -- $1,080.0 $ -- $ -- $ 212.3 $1,292.3
====== ======== ====== ======== ======== ========

Additions and terminations reported above for futures and options include
roll activity, which is the closing out of an old contract and initiation of a
new one when a contract is about to mature but the need for it still exists.

The following table summarizes the timing of anticipated settlements of
interest rate swaps outstanding at December 31, 1998, and the related weighted
average interest receive rate or pay rate assuming current market conditions.

1999 2000 2001 2002 Total
------ ------ ------ ------ --------
(in millions of dollars)

Receive Fixed/Pay Variable
Notional Value...................... $320.0 $330.0 $280.0 $150.0 $1,080.0
Weighted Average Receive Rate....... 7.70% 7.30% 7.70% 7.54% 7.56%
Weighted Average Pay Rate........... 5.07% 5.07% 5.07% 5.07% 5.07%

Hedging programs for derivative activity are as follows:

Program 1

The Company has executed a series of cash flow hedges in the individual
disability income portfolio and the group single premium annuities portfolio.
The purpose of these hedges is to lock in the reinvestment rates on future
cash flows and protect the Company from the potential adverse impact of
declining interest rates on the associated policy reserves. The Company uses
futures contracts to partially offset hedges on fixed maturity securities
purchased prior to the termination date of interest rate swaps and forwards.
The Company also uses futures contracts to replace terminated forwards and
interest rate swaps in order to maintain hedges until the fixed maturity
securities are purchased.

53

The following table summarizes the hedging activity under this program:

Notional
Amount
Outstanding Deferred
Additions Terminations at December 31 Gain
--------- ------------ -------------- --------
(in millions of dollars)

Individual Disability Income
1996
Interest Rate Swaps............ $ 200.0 $ 225.0 $ 470.0 $ 3.6
Futures........................ 144.5 134.5 10.0 3.6
-------- -------- -------- -----
Total........................ $ 344.5 $ 359.5 $ 480.0 $ 7.2
======== ======== ======== =====
1997
Interest Rate Swaps............ $ 420.0 $ 30.0 $ 860.0 $ 1.7
Forwards....................... 390.0 250.0 140.0 23.2
Futures........................ 247.5 214.0 43.5 2.4
Options--U.S. Treasury Interest
Rate.......................... 550.0 195.0 355.0 0.1
Options--Interest Rate Swaps... 850.0 850.0 -- 3.3
-------- -------- -------- -----
Total........................ $2,457.5 $1,539.0 $1,398.5 $30.7
======== ======== ======== =====
1998
Interest Rate Swaps............ $ 90.0 $ -- $ 950.0 $ --
Forwards....................... -- 140.0 -- 28.2
Futures........................ 50.0 93.5 -- 0.1
Options--U.S. Treasury Interest
Rate.......................... 135.0 355.0 135.0 0.4
Credit Options................. 70.0 -- 70.0 --
-------- -------- -------- -----
Total........................ $ 345.0 $ 588.5 $1,155.0 $28.7
======== ======== ======== =====
Group Single Premium Annuities
1996
Interest Rate Swaps............ $ 200.0 $ 70.0 $ 130.0 $ --
======== ======== ======== =====
1997
Interest Rate Swaps............ $ -- $ -- $ 130.0 $ --
Options--Interest Rate Swaps... 300.0 300.0 -- 0.5
-------- -------- -------- -----
Total........................ $ 300.0 $ 300.0 $ 130.0 $ 0.5
======== ======== ======== =====
1998
Interest Rate Swaps............ $ -- $ -- $ 130.0 $ --
======== ======== ======== =====

In 1998, 1997, and 1996, the Company amortized into net investment income
$1.9 million, $0.6 million, and $0.1 million, respectively, of the deferred
gains from this program. Realized investment gains and losses from this
program during 1998, 1997 and 1996 were immaterial.

At December 31, 1998 and 1997, the Company had an unrealized gain of $194.0
million and $133.8 million, respectively, on the open interest rate swaps,
forwards, and futures. These derivatives are scheduled to be terminated in the
years 1999 through 2002 as assets are purchased with the future anticipated
cash flows.

Program 2

In 1998 and 1997, the Company sold indexed annuity products whereby a
portion of the crediting rate on the annuity was based on the performance of
the S&P 500 stock index. In order to hedge this fluctuating credit rate, the
Company purchased options with the S&P 500 stock index as the underlying item.
These options will be settled with a net cash payment to the Company at the
expiration date if the S&P 500 index moves above the

54

option contract's strike price; otherwise, no cash payment will take place at
expiration. At December 31, 1998, the outstanding notional amount of these
options was $7.3 million, and the fair value and carrying amount were $4.2
million.

Program 3

In 1998 and 1997, the Company opened interest rate futures contracts and
wrote options on interest rate futures in order to hedge the borrowing rate on
the anticipated refinancing of long-term debt (see Note 8). The Company
realized a $10.3 million before-tax investment loss when these contracts were
terminated. The loss on these contracts was deferred and is being amortized as
an adjustment to interest and debt expense.

At December 31, 1998, the Company had no open contracts under this program.

Program 4

The Company routinely uses forwards and futures to protect margins by
reducing the risk of changes in interest rates between the time of asset
purchase and the associated sale of an asset or sale of new business.

Gains or losses on termination of these forwards and futures are deferred
and reported as an adjustment of the carrying amount of the hedged asset or
liability and amortized into earnings over the lives of the hedged items. The
net deferred gain associated with this activity was $28.9 million and $30.2
million at December 31, 1998 and 1997, respectively.

The deferred gain from this program amortized into income in the
consolidated statements of income was $1.3 million, $2.0 million, and $2.2
million for the years ended December 31, 1998, 1997, and 1996, respectively.

At December 31, 1998, the Company had no open contracts under this program.

Program 5

In 1994, the Company announced that it would discontinue the sale of
traditional GICs. At that time, the Company decided to convert from a duration
matching investment approach to a cash flow matching investment approach for
its GIC business. The Company hedged the risk that a rise in interest rates
would reduce the price on future sales of assets which would be necessary to
fund maturing liabilities by entering into forward interest rate swaps
(receive variable/pay fixed).

During 1996, the Company terminated $600.0 million of these forward swaps as
scheduled, realizing a $36.1 million before-tax investment loss. In addition,
the Company used offsetting futures contracts to partially remove the hedge as
fixed maturities were sold prior to the termination date of the interest rate
swaps. The Company realized a $5.3 million before-tax investment loss on the
termination of these futures contracts. The Company sold $423.0 million of
fixed maturity securities associated with this hedge, realizing a $19.6
million before-tax investment gain.

During 1997, the Company terminated the remaining $300.0 million of these
forward swaps as scheduled, realizing a $4.1 million before-tax investment
loss. In addition, the Company used offsetting futures contracts to partially
remove the hedge as fixed maturity securities were sold prior to the
termination date of the interest rate swaps. The Company realized a $0.1
million before-tax investment gain on the termination of these futures
contracts. The Company sold $302.0 million of fixed maturity securities
associated with this hedge, realizing a $4.3 million before-tax investment
gain.

At December 31, 1998, the Company had no open contracts under this program.

55

Note 5--Value of Business Acquired

A reconciliation of value of business acquired is as follows:

1998 1997
------------ ------------
(in millions of dollars)

Balance at January 1............................... $ 560.8 $ 5.9
Acquisition of Business--Note 13................. -- 648.0
Disposition of Business--Note 14................. (90.6) --
Interest Accrued................................. 37.4 33.1
Amortization..................................... (71.0) (64.3)
Change in Adjustment for Unrealized Investment
Gains........................................... 58.1 (59.6)
Change in Foreign Currency Translation
Adjustment...................................... (4.7) (2.3)
------------ ------------
Balance at December 31............................. $ 490.0 $ 560.8
============ ============

The carrying amount of value of business acquired in 1996 was immaterial.

The estimated net amortization of value of business acquired for each of the
next five years is as follows (in millions of dollars):

1999............................... $32.9
2000............................... 32.1
2001............................... 31.3
2002............................... 30.5
2003............................... 29.7

Note 6--Liability for Unpaid Claims and Claim Adjustment Expenses

Changes in the liability for unpaid claims and claim adjustment expenses
were as follows:

1998 1997 1996
-------- -------- --------
(in millions of dollars)

Balance at January 1.............................. $6,271.8 $3,047.5 $2,824.7
Less Reinsurance Recoverables................... 857.7 372.1 343.2
-------- -------- --------
Net Balance at January 1.......................... 5,414.1 2,675.4 2,481.5
Acquisition of Business--Note 13.................. -- 2,295.4 --
Incurred Related to:
Current Year.................................... 1,864.2 1,537.3 910.6
Prior Years
Interest...................................... 337.3 285.0 173.3
Incurred...................................... (49.5) (30.5) (65.5)
-------- -------- --------
Total Incurred.................................... 2,152.0 1,791.8 1,018.4
-------- -------- --------
Paid Related to:
Current Year.................................... 519.5 337.2 322.4
Prior Years..................................... 1,100.4 1,011.3 502.1
-------- -------- --------
Total Paid........................................ 1,619.9 1,348.5 824.5
-------- -------- --------
Net Balance at December 31........................ 5,946.2 5,414.1 2,675.4
Plus Reinsurance Recoverables................... 768.8 857.7 372.1
-------- -------- --------
Balance at December 31............................ $6,715.0 $6,271.8 $3,047.5
======== ======== ========

The majority of the net balances are related to disabled lives claims with
long-tail payouts on which interest earned on assets backing liabilities is an
integral part of pricing and reserving. Interest accrued on prior year

56

reserves has been calculated on the opening reserve balance less one-half
year's cash payments at the average reserve discount rate used by the Company
during 1998, 1997, and 1996.

During the fourth quarter of 1998, the Company recorded an increase in the
reserve for existing individual and group disability claims of $93.6 million.
This reserve increase is related to the expected increase in claims duration
due to management's expectation that productivity in the claims organization
will be impacted as a result of planning, consolidation, and integration
efforts related to the merger with UNUM Corporation (see Note 17).

Note 7--Federal Income Taxes

A reconciliation of the income tax attributable to continuing operations
computed at U.S. federal statutory tax rates to the income tax expense as
included in the consolidated statements of income follows:

Year Ended December 31
-------------------------
1998 1997 1996
------- ------- -------

Statutory Income Tax Rate............................ 35.0% 35.0% 35.0%
Tax-preferred Investment Income...................... (0.5) (0.6) (1.1)
Other Items, Net..................................... 2.4 0.6 1.7
------- ------- -------
Effective Tax Rate................................... 36.9% 35.0% 35.6%
======= ======= =======

Significant components of the Company's deferred federal income tax
liability are as follows:

December 31
-------------------------
1998 1997
------------ ------------
(in millions of dollars)

Deferred Tax Liability
Deferred Policy Acquisition Costs.................. $ 69.2 $ 68.0
Bond Market Discount............................... 15.7 4.3
Net Unrealized Investment Gains.................... 388.2 334.7
Value of Business Acquired......................... 174.0 217.6
Property and Equipment............................. 11.3 10.5
Other.............................................. 15.7 34.5
------------ ------------
Total Deferred Tax Liability..................... 674.1 669.6
------------ ------------
Deferred Tax Asset
Reserves........................................... 294.5 367.4
Realized Investment Gains and Losses............... 68.4 53.1
Postretirement Benefits............................ 24.1 26.8
Other Employee Benefits............................ 31.5 29.3
Other.............................................. 17.4 43.2
------------ ------------
Total Deferred Tax Asset......................... 435.9 519.8
------------ ------------
Net Deferred Tax Liability........................... $ 238.2 $ 149.8
============ ============

The Company is required to establish a valuation allowance for any portion
of the deferred tax asset that management believes will not be realized. In
the opinion of management, it is more likely than not that the Company will
realize the benefit of the deferred tax asset and, therefore, no such
valuation allowance has been established.

Under the Life Insurance Company Tax Act of 1959, life companies were
required to maintain a policyholders' surplus account containing the
accumulated portion of current income which had not been subjected to income
tax in the year earned. The Deficit Reduction Act of 1984 requires that no
future amounts

57

be added after 1983 to the policyholders' surplus account. Further, any future
distributions from the account would become subject to federal income taxes at
the general corporate federal income tax rate then in effect. The amount of
the policyholders' surplus account at December 31, 1998, is approximately
$202.0 million. Future distributions from the policyholders' surplus account
are deemed to occur if a statutorily prescribed maximum for the account is
less than the value of the account or if dividend distributions exceed the
total amount accumulated as currently taxable income in the year earned. If
the entire policyholders' surplus account were deemed distributed in 1999,
this would result in a tax of approximately $70.7 million. No current or
deferred federal income taxes have been provided on these amounts because
management considers the conditions under which such taxes would be paid to be
remote.

In 1998, the Company negotiated a tentative settlement with the Internal
Revenue Service of its federal income tax liability for years 1986 through
1992. The Internal Revenue Service continued its examination of the Company's
federal income tax returns for tax years 1993 through 1995. Management
believes this settlement and examination will have no material adverse impact
on the Company's financial statements.

In 1996, the Company received a refund that had been accrued in 1995
relating to the final settlement of litigation for tax years 1980 through
1983. The refund of taxes was $1.5 million, and interest on the refund was
$4.2 million. The Company also received a refund that had been accrued in 1994
relating to a final settlement of the remaining issues in dispute for the 1984
and 1985 tax years. The refund of taxes was $3.1 million, and related interest
was $5.9 million.

Federal income taxes paid during 1998, 1997, and 1996 were $78.4 million,
$122.7 million, and $92.5 million, respectively.

Note 8--Debt and Company-Obligated Mandatorily Redeemable Preferred Securities

Debt

Short-term debt at December 31, 1998 and 1997, was $39.4 million and $150.7
million, respectively, and consisted of reverse repurchase agreements with a
weighted average interest rate of 5.75% and 6.38%, respectively.

In March 1998, the Company completed a public offering of $200.0 million of
7.25% senior notes due March 15, 2028. In July 1998, the Company completed a
public offering of $200.0 million of 6.375% senior notes due July 15, 2005,
and $200.0 million of 7% senior notes due July 15, 2018. The 7.25% senior
notes are redeemable at the option of the Company. The 6.375% and 7% senior
notes may not be redeemed prior to maturity.

During 1998, the Company repaid the $725.0 million outstanding borrowing
under its revolving credit facility. The interest rate on the revolving credit
facility was variable based upon a London Interbank Offered Rate (LIBOR) plus
a margin.

Interest paid on short-term and long-term debt during 1998, 1997, and 1996
was $49.6 million, $41.4 million, and $17.1 million, respectively.

Company-Obligated Mandatorily Redeemable Preferred Securities

In March 1998, Provident Financing Trust I, a wholly-owned subsidiary trust
of the Company, issued $300.0 million of 7.405% capital securities in a public
offering. These capital securities, which mature on March 15, 2038, are fully
and unconditionally guaranteed by the Company, have a liquidation value of
$1,000 per capital security, and have a mandatory redemption feature under
certain circumstances. The Company issued $300.0 million of 7.405% junior
subordinated deferrable interest debentures which mature on March 15, 2038, to
the subsidiary trust in connection with the capital securities offering. The
sole assets of the subsidiary trust are the junior subordinated debt
securities.

58

Interest costs related to these securities are reported in the consolidated
statements of income as a component of interest and debt expense. Interest
paid on these securities during 1998 was $11.1 million.

Note 9--Pensions and Other Postretirement Benefits

The Company sponsors defined benefit pension and postretirement plans for
its employees. Plan assets of the pension plan are invested in two separate
accounts of a subsidiary of the Company, one of which invests in listed equity
securities and the other in corporate obligations and U.S. bonds, and in an
unrelated trust consisting of bonds and equity securities. The postretirement
life insurance plan is noncontributory and is partially funded through life
insurance contracts issued by the Company. The postretirement health care plan
is unfunded.

In 1998, the Company amended its other postretirement benefit plans,
establishing uniform benefits among the Company's subsidiaries.

The following tables provide the changes in the benefit obligation and fair
value of plan assets for the years ended December 31, 1998 and 1997, and
statements of the funded status of the plans as of December 31, 1998 and 1997.

Postretirement
Pension Benefits Benefits
------------------ ----------------
1998 1997 1998 1997
-------- -------- ------- -------
(in millions of dollars)

Change in Benefit Obligation
Balance at January 1..................... $ 308.2 $ 189.8 $ 68.0 $ 59.2
Service Cost........................... 9.3 9.1 2.8 1.5
Interest Cost.......................... 21.6 20.5 5.4 4.4
Plan Amendments........................ -- -- 8.7 --
Actuarial (Gain) Loss.................. 7.0 10.5 5.0 (6.6)
Acquisition of Business--Note 13....... -- 92.2 -- 13.5
Benefits Paid.......................... (16.6) (13.9) (4.9) (4.0)
-------- ------- ------- -------
Balance at December 31................... 329.5 308.2 85.0 68.0
-------- ------- ------- -------
Change in Fair Value of Plan Assets
Balance at January 1..................... 380.8 220.2 9.0 8.5
Actual Return on Plan Assets........... 83.3 83.1 0.5 0.5
Acquisition of Business--Note 13....... -- 91.4 -- --
Company Contributions.................. 1.6 -- 4.9 4.0
Benefits Paid.......................... (16.6) (13.9) (4.9) (4.0)
-------- ------- ------- -------
Balance at December 31................... 449.1 380.8 9.5 9.0
-------- ------- ------- -------
Funded (Underfunded) Status of the Plan
at December 31.......................... 119.6 72.6 (75.5) (59.0)
Unrecognized Net Actuarial Gains......... (112.7) (72.1) (4.0) (11.0)
Unrecognized Prior Service Cost.......... 2.5 2.7 8.0 --
Unrecognized Net Transition Obligation... 0.6 0.6 -- --
-------- ------- ------- -------
Prepaid (Accrued) Benefit Cost........... $ 10.0 $ 3.8 $ (71.5) $ (70.0)
======== ======= ======= =======

The weighted average assumptions used in the measurement of the Company's
benefit obligation as of December 31, 1998 and 1997 are as follows:

Postretirement
Pension Benefits Benefits
------------------ ----------------
1998 1997 1998 1997
-------- -------- ------- -------

Discount Rate............................ 6.75% 7.25% 6.75% 7.25%
Expected Return on Plan Assets........... 8.50% 8.65% 8.50% 8.50%
Rate of Compensation Increase............ 4.00% 4.65% -- --

59

For measurement purposes, a 8.67% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.00% for 2005 and remain at that level
thereafter.

The assumed health care cost trend rate has a significant effect on the
amounts reported. A 1% change in the assumed health care cost trend rate would
have the following effects:

1% Increase 1% Decrease
------------ ------------
(in millions of dollars)

Effect on total of service and interest cost
components of net periodic postretirement
health care benefit cost..................... $ 1.2 $ (1.0)
Effect on the health care component of the
accumulated postretirement benefit
obligation................................... 10.2 (8.8)

The following table provides the components of the net periodic benefit cost
(credit) for the plans during 1998, 1997, and 1996.

Pension Benefits Postretirement Benefits
------------------- -------------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ------- ------- -------
(in millions of dollars)

Service Cost.................. $ 9.3 $ 9.1 $ 4.0 $ 2.8 $ 1.5 $ 1.5
Interest Cost................. 21.6 20.5 12.6 5.4 4.4 4.0
Expected Return on Plan
Assets....................... (32.5) (26.6) (16.4) (0.8) (0.7) (0.7)
Net Amortization and
Deferral..................... (2.4) (3.5) (4.2) (1.7) (3.0) (2.8)
----- ----- ----- ------- ------- -------
Net Periodic Benefit Cost
(Credit)..................... $(4.0) $(0.5) $(4.0) $ 5.7 $ 2.2 $ 2.0
===== ===== ===== ======= ======= =======

Note 10--Stockholders' Equity and Earnings Per Share

Preferred Stock

During February 1998, the Company redeemed its 8.10% cumulative preferred
stock outstanding of $156.2 million at $150 per share equivalent to $25 per
depositary share. At December 31, 1997, there were 6,249,202 shares issued and
outstanding.

Common Stock

In July 1997, the Board of Directors authorized a two-for-one stock split
effected in the form of a stock dividend distributed on September 30, 1997. As
a result of this action, 67,547,586 shares were issued to stockholders of
record on August 28, 1997. Par value remained at $1 per share as a result of
transferring $67.5 million from additional paid-in capital to common stock,
representing the aggregate par value of the shares issued under the stock
split. Historical share and per share amounts in the consolidated financial
statements and notes thereto have been restated to reflect the stock split.

Comprehensive Income

The components of accumulated other comprehensive income, net of deferred
tax, are as follows:

December 31
--------------------------
1998 1997
------------ ------------
(in millions of dollars)

Net Unrealized Gain on Securities:
Available-for-Sale Securities.................... $ 1,042.0 $ 1,002.7
Adjustment to Deferred Policy Acquisition Costs.. (214.6) (236.2)
Adjustment to Value of Business Acquired......... (1.0) (38.8)
Adjustment to Reserves for Future Policy and
Contract Benefits............................... (105.4) (103.4)
------------ ------------
Total Net Unrealized Gain on Securities............ 721.0 624.3
Foreign Currency Translation Adjustment............ (35.3) (20.7)
------------ ------------
Accumulated Other Comprehensive Income............. $ 685.7 $ 603.6
============ ============

60

When securities are reported at fair value, adjustments are made to deferred
policy acquisition costs, value of business acquired, and reserves for future
policy and contract benefits as if the unrealized investment gains and losses
on the securities had been realized.

The components of other comprehensive income (loss) and the related deferred
tax are as follows:

Year Ended December 31
----------------------------
1998 1997 1996
-------- --------- --------
(in millions of dollars)

Change in Net Unrealized Gain on Securities:
Net Unrealized Gain (Loss) Before
Reclassification Adjustment................... $ 94.5 $ 1,064.2 $ (371.5)
Reclassification Adjustment for Net Realized
Investment (Gains) Losses Included in Net In-
come.......................................... (34.0) (15.1) 8.6
Adjustment to Value of Business Acquired....... 58.1 (59.6) --
Adjustment to Deferred Policy Acquisition
Costs......................................... 33.1 (121.9) 142.6
Adjustment to Reserves for Future Policy and
Contract Benefits............................. (3.0) (48.4) 203.3
------- --------- --------
Change in Net Unrealized Gain on Securities...... 148.7 819.2 (17.0)
Change in Foreign Currency Translation
Adjustment...................................... (22.4) (22.4) (0.5)
------- --------- --------
126.3 796.8 (17.5)
Deferred Tax (Credit)............................ 44.2 278.9 (6.1)
------- --------- --------
Other Comprehensive Income (Loss), Net of
Deferred Tax (Credit)........................... $ 82.1 $ 517.9 $ (11.4)
======= ========= ========

The deferred tax (credit) for other comprehensive items is computed at the
federal statutory income tax rate.

Earnings Per Common Share

The computations of earnings per common share and earnings per common share
assuming dilution are as follows:

Year Ended December 31
--------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(in millions of dollars, except share data)

Numerator:
Net Income....................... $254.0 $247.3 $145.6
Preferred Stock Dividends........ 1.9 12.7 12.7
-------------- -------------- -------------
Income Available to Common
Stockholders.................... $252.1 $234.6 $132.9
============== ============== =============
Denominator (000s):
Weighted Average Common Shares--
Basic........................... 135,117.8 124,505.4 91,044.8
Dilution for Assumed Exercise of
Stock Options................... 3,151.4 2,747.8 1,109.7
-------------- -------------- -------------
Weighted Average Common Shares--
Assuming Dilution............... 138,269.2 127,253.2 92,154.5
============== ============== =============
Earnings Per Common Share--Basic... $1.87 $1.88 $1.46
============== ============== =============
Earnings Per Common Share--Assuming
Dilution.......................... $1.82 $1.84 $1.44
============== ============== =============

Options to purchase approximately 1,022,000 common shares in 1998 were not
considered dilutive because the options' exercise prices were greater than the
average market price. These options were excluded from the calculation of
earnings per common share assuming dilution. Nondilutive options excluded from
the calculation of earnings per common share assuming dilution for 1997 and
1996 were immaterial.

61

Note 11--Incentive Compensation and Stock Purchase Plans

Incentive Compensation

The Company has in effect a management incentive compensation plan, the
first part of which contains both cash and equity components and is designed
to encourage achievement of specific annual goals in which key employees
participate. The compensation cost recognized in the consolidated statements
of income for this part of the plan is $4.3 million, $6.4 million, and $3.6
million for 1998, 1997, and 1996, respectively. The second part of this plan
is a stock option plan. The Company applies Opinion 25 and related
interpretations in accounting for the stock option plan.

Under the 1994 stock plan, the Company could grant options of up to
10,000,000 shares of common stock over the five year term of the plan which
ended effective December 31, 1998. The exercise price of each option equaled
the market price of the Company's stock on the date of grant. The vesting
period for these options is at least one year after the date of grant, and the
options have a maximum term of ten years after the date of grant. Options
granted prior to 1994 were under the 1989 stock option plan.

During 1998, the Company granted options of common stock to eligible
employees who were not participants in the management incentive compensation
plan. The exercise price of each option equaled the market price of the
Company's stock on the date of grant. The vesting period for these options is
three years, and the options have a maximum term of ten years after the grant
date. Options of 311,900 shares of common stock were granted.

In accordance with stock option plan provisions, outstanding stock options
would become immediately exercisable in the event of a change in control of
the Company.

Summaries of the Company's stock options are as follows:

1998 1997 1996
------------------------ ------------------------ ------------------------
Shares Weighted Average Shares Weighted Average Shares Weighted Average
(000s) Exercise Price (000s) Exercise Price (000s) Exercise Price
------ ---------------- ------ ---------------- ------ ----------------

Outstanding at January
1...................... 6,938 $18.52 4,239 $13.38 3,297 $12.41
Granted............... 1,022 35.99 3,454 24.50 1,347 15.57
Exercised............. (1,040) 15.70 (562) 14.49 (322) 12.08
Forfeited or Expired.. (182) 31.56 (193) 24.36 (83) 15.21
------ ----- -----
Outstanding at December
31..................... 6,738 21.26 6,938 18.52 4,239 13.38
====== ===== =====

December 31
-----------------------
1998 1997 1996
------- ------- -------
(shares in thousands)

Exercisable............................................. 3,389 3,728 2,954
Exercisable based on additional service................. 3,349 3,210 1,285
------- ------- -------
Outstanding............................................. 6,738 6,938 4,239
======= ======= =======

December 31, 1998
----------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------- -----------------------
Weighted Average
Range of Shares Remaining Weighted Average Shares Weighted Average
Exercise Prices (000s) Contractual Life Exercise Price (000s) Exercise Price
- --------------- ------ ---------------- ---------------- ------ ----------------

$ 9.00 to
14.99 1,774 2.9 years $11.31 1,774 $11.31
15.00 to
20.99 999 6.6 15.49 999 15.49
21.00 to
26.99 2,718 8.1 24.00 543 24.29
27.00 to
32.99 314 8.2 28.04 22 28.05
33.00 to
40.00 933 9.1 36.04 51 37.40
----- -----
9.00 to 40.00 6,738 6.6 21.26 3,389 15.13
===== =====

62

Employee Stock Purchase Plan

The Company established an employee stock purchase plan to promote and
maintain widespread employee stock ownership. Under the plan, the Company is
authorized to issue up to 2,000,000 shares of common stock to its employees,
nearly all of whom are eligible to participate. Under the terms of the plan,
eligible employees may purchase common stock of the Company at the end of each
three-month financial quarter. The purchase price of the stock is 85 percent
of the lower of its beginning of the quarter or end of the quarter market
price. The maximum amount of stock a participating employee may purchase under
the plan in any one calendar year is limited to $25,000 in fair market value
of the stock as determined at the beginning of each purchase period. The
Company sold 103,527, 108,799, and 68,622 shares to employees with a weighted
average exercise price of $28.47, $24.63, and $14.68 per share in 1998, 1997,
and 1996, respectively. The Company applies Opinion 25 and related
interpretations in accounting for the stock purchase plan. Accordingly, no
compensation cost has been recognized.

Compensation Cost Under the Fair Value Approach (SFAS 123)

Compensation cost for the Company's management incentive compensation plan
and employee stock purchase plan under the fair value approach was estimated
as of the grant date using the Black-Scholes option pricing model with the
following weighted average assumptions:

Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------

Volatility...................................... 17.9% 18.0% 18.2%
Risk-free rate of return........................ 5.6% 6.5% 5.7%
Dividend payout rate per share.................. $ 0.40 $0.36 $0.36
Time of exercise
Management Incentive Compensation Plan
Executives.................................. 8 years 7 years 7 years
Non-executives.............................. 7 years 6 years 6 years
Employee Stock Purchase Plan.................. 3 months 3 months 3 months
Weighted average fair value of options granted
during the year
Management Incentive Compensation Plan........ $10.65 $7.36 $3.68
Employee Stock Purchase Plan.................. $ 6.94 $5.62 $3.38

Had compensation cost for the two plans been determined in accordance with
the provisions of SFAS 123, the Company's net income and earnings per common
share would have been as follows:

Year Ended December 31
--------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(in millions of dollars, except share data)

Net Income....................... $ 247.7 $ 241.6 $ 143.6
Earnings Per Common Share--
Basic........................... 1.82 1.84 1.44
Earnings Per Common Share--
Assuming Dilution............... 1.79 1.81 1.42

Note 12--Reinsurance

The Company routinely assumes and cedes reinsurance with other insurance
companies. The primary purpose of ceded reinsurance is to limit losses from
large exposures; however, if the assuming reinsurer is unable to meet its
obligations, the Company remains contingently liable. The Company evaluates
the financial condition of reinsurers and monitors concentration of credit
risk to minimize this exposure. The reinsurance receivable at December 31,
1998, relates to approximately 33 reinsurance relationships. Of the three
major relationships which account for approximately 85 percent of the
reinsurance receivable amount at December 31, 1998, two are with companies
rated A+ (Superior) by the A.M. Best Company and the third is fully
securitized by investment-grade fixed maturity securities held in trust.

63

Reinsurance activity is accounted for on a basis consistent with the terms
of the reinsurance contracts and the accounting used for the original policies
issued. Premium income, policy and contract benefits, and changes in reserves
for future policy and contract benefits and policyholders' funds are presented
in the consolidated statements of income net of reinsurance ceded. The total
amounts deducted for reinsurance ceded are as follows:

Year Ended December 31
---------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

Premium Income.................................... $ 130.2 $ 270.4 $ 305.5
Policy and Contract Benefits...................... 259.4 282.7 265.5
Change in Reserves for Future Policy and Contract
Benefits and Policyholders' Funds................ (60.5) 3.6 26.4

In 1995, the Company entered into an indemnity and assumption reinsurance
agreement with another insurance company in connection with the sale of the
group medical business. Total premium income and policy and contract benefits
ceded under this reinsurance agreement were $41.7 million and $33.3 million,
respectively, for the year ended December 31, 1998, $182.9 million and $153.8
million, respectively, for the year ended December 31, 1997, and $224.6
million and $188.5 million, respectively, for the year ended December 31,
1996. Substantially all of the business reinsured under the indemnity
reinsurance agreement was assumptively reinsured effective April 1, 1998.

Premium income assumed was $204.4 million, $174.4 million, and $51.5 million
during 1998, 1997, and 1996, respectively.

Note 13--Acquisition of Business

GENEX Services, Inc.

On February 28, 1997, the Company acquired GENEX Services, Inc. and GENEX
Services of Canada, Inc. (GENEX) at a price of $70.0 million. GENEX is a
provider of case management, vocational rehabilitation, and related services
to corporations, third party administrators, and insurance companies. These
services are utilized in the management of disability and worker's
compensation cases. The acquisition, financed through borrowings on the
Company's revolving credit facility, was accounted for by the purchase method.
The fair values of the assets acquired and liabilities assumed were $17.9
million and $8.9 million, respectively. The purchase price has been allocated
to goodwill and will be amortized on a straight-line basis over a 25 year
period. The consolidated financial statements include the operating results of
GENEX from March 1, 1997.

The Paul Revere Corporation

On March 27, 1997, the Company acquired The Paul Revere Corporation (Paul
Revere), a provider of life and disability insurance products, at a price of
approximately $1.2 billion. The transaction was financed through common equity
issued to Zurich Insurance Company, a Swiss insurer, and its affiliates in the
amount of $300.0 million (19,047,620 shares of common stock), common equity of
$437.5 million (23,340,000 shares of common stock) and cash of $2.5 million
issued to Paul Revere shareholders, internally generated funds of $145.0
million, and borrowings on the Company's revolving credit facility of $305.0
million. The acquisition was accounted for by the purchase method. The fair
values of the assets acquired and liabilities assumed were $6,680.0 million
and $6,675.4 million, respectively. The purchase price has been allocated
principally to the value of business acquired with the remainder being
allocated to goodwill. The interest rate used to determine the value of
business acquired for traditional products was the reserve discount rate. The
interest rate used for interest-sensitive products was based on the current
interest rate credited on account values. The value of business acquired will
be amortized with interest based on premium income for the traditional
individual life and disability income products and on the estimates of future
gross profits for interest-sensitive individual life products. Goodwill will
be amortized on a straight-line basis over a 40 year period. The consolidated
financial statements include the operating results of Paul Revere from April
1, 1997.

64

Pro Forma Results

The following pro forma results of operations for the years ended December
31, 1997 and 1996, give effect to the acquisitions and the related financing
arrangements, including the acquisition of debt and issuance of common stock
equity. The pro forma results of operations, prepared from historical
financial results of operations of the Company, Paul Revere, and GENEX, with
such adjustments as are necessary to present the results of operations as if
the acquisitions had occurred as of the beginning of each year presented, are
as follows:

Year Ended December 31
-------------------------------------------
1997 1996
--------------------- ---------------------
(in millions of dollars, except share data)

Revenue Excluding Net Realized
Investment Gains and Losses...... $ 3,958.1 $ 3,930.2
Revenue Including Net Realized
Investment Gains and Losses...... 4,009.6 3,970.2
Income (Loss) Before Net Realized
Investment Gains and Losses
and Federal Income Taxes......... 377.2 (81.3)
Income (Loss) Before Federal
Income Taxes..................... 428.7 (41.3)
Net Income (Loss)................. 276.3 (37.1)
Earnings Per Common Share--Basic.. 1.96 (0.37)
Earnings Per Common Share--
Assuming Dilution................ 1.92 (0.37)

In 1996, Paul Revere strengthened reserves in its individual disability
segment by $380.0 million before income taxes, which resulted in a decrease in
net income of $244.3 million ($1.82 per common share assuming dilution). The
reserve strengthening results from a comprehensive study, completed in October
1996, of the adequacy of the individual disability reserves under generally
accepted accounting principles.

Note 14--Sale of a Portion of a Line of Business

In December 1997, the Company entered into an agreement with American
General Corporation (American General) under which various affiliates of
American General agreed to acquire certain assets and assume certain
liabilities of the Company's individual and tax-sheltered annuity business. In
addition, American General acquired a number of miscellaneous group pension
lines of business which were no longer actively marketed by the Company. The
sale did not include the Company's Canadian annuity business, GICs, or group
single premium annuities. The sale was completed during the second quarter of
1998.

In consideration for the transfer of statutory reserves, American General
paid the Company a ceding commission of $58.0 million. In connection with the
sale, the Company wrote off $18.7 million of goodwill associated with the
annuity business acquired from Paul Revere. Total liabilities of $2,518.9
million were assumed by American General, and total assets, excluding the
resulting reinsurance receivable, decreased $2,506.7 million. The gain
recognized at the time of the sale increased 1998 operating earnings by $12.2
million ($0.09 per common share assuming dilution) before tax and $1.4 million
($0.01 per common share assuming dilution) after tax. Total revenue and income
before federal income taxes for the annuity business sold were $152.7 million
and $23.7 million, respectively, in 1997, and $24.6 and $0.1 million,
respectively, in 1996. Included in these amounts were net realized investment
gains of $8.0 million in 1997 and $0.5 million in 1996.

Note 15--Commitments and Contingent Liabilities

Two alleged class action lawsuits have been filed in Superior Court in
Worcester, Massachusetts (the Court) against the Company--one purporting to
represent all career agents of Paul Revere whose employment relationships
ended on June 30, 1997 and were offered contracts to sell insurance policies
as independent producers, and the other purporting to represent independent
brokers who sold certain Paul Revere individual disability income policies
with benefit riders. Motions filed by the Company to dismiss most of the
counts in the complaints, which allege various breach of contract and
statutory claims, have been denied, but the cases remain at a preliminary
stage. To date, no class has been certified in either lawsuit. The Company has
filed a conditional

65

counterclaim in each action which requests a substantial return of commissions
should the Court agree with the plaintiff's interpretation of the contract.
The Company has strong defenses to both lawsuits and will vigorously defend
its position and resist certification of the classes. In addition, the same
plaintiff's attorney who has filed the purported class action lawsuits has
filed 42 individual lawsuits on behalf of current and former Paul Revere sales
managers alleging various breach of contract claims. The Company has filed a
motion in federal court to compel arbitration for 16 of the plaintiffs who are
licensed by the National Association of Securities Dealers and have executed
the Uniform Application for Registration or Transfer in the Securities
Industry (Form U-4). The Company has strong defenses and will vigorously
defend its position in these cases as well. Although the alleged class action
lawsuits and the 42 individual lawsuits are in the early stages, management
does not currently expect these suits to materially affect the financial
position or results of operations of the Company.

Various lawsuits against the Company have arisen in the normal course of
business. Contingent liabilities that might arise from litigation are not
deemed likely to materially affect the financial position or results of
operations of the Company.

Note 16--Statutory Financial Information

Statutory Net Income, Capital and Surplus, and Dividends

The Company's insurance subsidiaries' statutory net income, as reported in
conformity with statutory accounting practices prescribed by state regulatory
authorities, for the years ended December 31, 1998, 1997, and 1996, was $161.1
million, $76.1 million, and $104.9 million, respectively. Statutory capital
and surplus at December 31, 1998 and 1997, was $1,252.1 million and $1,128.2
million, respectively.

Regulatory restrictions limit the amount of dividends available for
distribution to the Company from its insurance subsidiaries, without prior
approval by regulatory authorities, to the greater of ten percent of an
insurer's statutory surplus as regards policyholders as of the preceding year
end or the statutory net gain from operations, excluding realized investment
gains and losses, of the preceding year. The payment of dividends is further
limited to the amount of statutory unassigned surplus. Based on these
restrictions, $153.3 million will be available for the payment of dividends to
the Company from its top-tier insurance subsidiaries during 1999.

Permitted Statutory Accounting Practices

The Company's insurance subsidiaries prepare their statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by
the National Association of Insurance Commissioners (NAIC) and the applicable
state regulatory authorities. Prescribed statutory accounting practices
include state laws, regulations, and general administrative rules, as well as
a variety of publications of the NAIC. Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices may differ from state to state, may differ from company to company
within a state, and may change in the future. At December 31, 1998, the
Company had not applied any permitted accounting practices that differed from
prescribed statutory accounting practices that had a material impact on the
financial position or results of operations of the insurance subsidiaries.

In 1998, the NAIC approved a codification of statutory accounting practices
effective January 1, 2001, which will serve as a comprehensive and
standardized guide to statutory accounting principles. Following
implementation, statutory accounting principles will continue to be governed
by individual state laws and permitted practices until adoption by the various
states. Accordingly, before codification becomes effective for the Company's
insurance subsidiaries, their states of domicile must adopt codification as
the prescribed basis of accounting. The adoption of the codification will
change, to some extent, the accounting practices that the Company's insurance
subsidiaries use to prepare their statutory financial statements.

Deposits

At December 31, 1998, the Company's insurance subsidiaries had on deposit
with regulatory authorities securities with a book value of $1,002.6 million
held for the protection of policyholders.

66

Note 17--Merger with UNUM Corporation (Unaudited)

In November 1998, the Company announced its plans to merge with UNUM
Corporation (UNUM), a leading provider of disability products and other
employee benefits, in a transaction that will create UNUMProvident Corporation
(UNUMProvident). In the merger, each share of UNUM common stock issued and
outstanding immediately prior to the effective time of the merger will be
converted into one share of UNUMProvident common stock. Each share of the
Company's common stock issued and outstanding immediately prior to the
effective time of the merger will remain an issued and outstanding share of
UNUMProvident common stock after the merger. However, as a result of the
Provident Reclassification Amendment, which will become effective immediately
prior to the effective time of the merger, each share of the Company's common
stock issued and outstanding immediately prior to the effective time of the
Provident Reclassification Amendment will be reclassified and converted into
0.73 of a validly issued, fully paid, and nonassessable share of UNUMProvident
common stock. The reclassification will not apply to UNUMProvident common
stock issued to UNUM stockholders in the merger. The merger is subject to
regulatory and UNUM stockholder and Company stockholder approval. The
transaction is expected to be completed by mid-1999 and is expected to be
accounted for as a pooling of interests.

Pro Forma Combined Condensed Financial Statements

The following pro forma combined condensed financial statements are
presented to show the impact on the historical financial positions and results
of operations of the Company and UNUM of the merger under the pooling of
interests method of accounting. The pro forma combined condensed financial
statements combine the historical financial information of the Company and
UNUM as of December 31, 1998 and for each of the years ended December 31,
1998, 1997, and 1996. The pro forma combined condensed statements of income
give effect to the merger as if it had been completed at the beginning of each
year presented. The pro forma combined condensed balance sheet assumes the
merger was completed on December 31, 1998.

On the date the merger is completed or on an earlier date if required by
generally accepted accounting principles, UNUMProvident will record an expense
for merger related expenses of approximately $210.0 million. These expenses
consist of employee-related expenses, exit activities related to duplicate
facilities and redundant systems, and investment banking, legal, and
accounting fees. Since the incurral of the merger related expenses is related
to and primarily dependent upon the completion of the transaction, which will
occur in the future, the merger related expenses will be recognized as a
charge to earnings at the time of the transaction closing. The estimated
merger related expenses represent management's best estimates based on
available information at this time. Actual charges will differ from these
estimates.

67

The pro forma financial statements are presented for comparative purposes
only and are not necessarily indicative of the results of operations that
would have been realized had the merger been completed during the years or as
of the date for which the pro forma financial statements are presented, nor
are they necessarily indicative of the results of operations in future periods
or the future financial position of UNUMProvident.

Provident Companies, Inc. and UNUM Corporation
Unaudited Pro Forma Combined Condensed Balance Sheet
As of December 31, 1998

Historical UNUM/Provident
-------------------- Pro Forma Pro Forma
Provident UNUM Adjustments Combined
--------- --------- ----------- --------------
(in millions of dollars)

Assets
Total Investments........... $17,332.7 $ 9,837.7 $ -- $27,170.4
Reinsurance Receivable...... 3,101.0 1,770.0 -- 4,871.0
All Other Assets............ 2,654.4 3,575.2 -- 6,229.6
--------- --------- ------- ---------
Total Assets.............. $23,088.1 $15,182.9 $ -- $38,271.0
========= ========= ======= =========
Liabilities and
Stockholders' Equity
Policy and Contract
Benefits, Reserves for
Future Policy and Contract
Benefits, and Unearned
Premiums................... $14,343.0 $ 9,201.4 $ 230.0 (a) $23,774.4
Other Policyholders' Funds.. 3,227.3 875.4 -- 4,102.7
All Other Liabilities....... 1,809.3 2,368.4 (80.0)(a) 4,097.7
--------- --------- ------- ---------
Total Liabilities......... 19,379.6 12,445.2 150.0 31,974.8
--------- --------- ------- ---------
Company-Obligated
Mandatorily Redeemable
Preferred Securities of
Subsidiary Trust Holding
Solely Junior Subordinated
Debt Securities of the
Company.................... 300.0 -- -- 300.0
--------- --------- ------- ---------
Stockholders' Equity
Common Stock................ 135.7 20.0 (131.9)(b) 23.8
Additional Paid-in Capital.. 762.0 1,151.2 (954.0)(b) 959.2
Accumulated Other
Comprehensive Income....... 685.7 229.0 -- 914.7
Retained Earnings........... 1,834.3 2,444.9 (150.0)(a) 4,129.2
Treasury Stock.............. (9.2) (1,085.9) 1,085.9 (b) (9.2)
Restricted Stock Deferred
Compensation............... -- (21.5) -- (21.5)
--------- --------- ------- ---------
Total Stockholders'
Equity................... 3,408.5 2,737.7 (150.0) 5,996.2
--------- ========= ------- ---------
Total Liabilities and
Stockholders' Equity..... $23,088.1 $15,182.9 $ -- $38,271.0
========= ========= ======= =========

- --------
(a) The Company and UNUM are in the process of reviewing their accounting
policies and financial statement classifications. One aspect of this
preliminary review has indicated that UNUM's process and assumptions used
to calculate the discount rate for claim reserves of certain disability
businesses differs from that used by the Company. It has been determined
that the Company's process and assumptions are more appropriate in the
context of a combined entity. Upon completion of the merger, UNUM will
reduce the rates used to discount claim reserves for group long-term
disability and individual disability. The preliminary estimates of
discount rate reductions will result in an estimated increase to UNUM's
claim reserves upon consummation of the merger of approximately $230.0
million ($150.0 million after tax). This estimated merger related
adjustment has not been reflected in the unaudited pro forma combined
condensed statements of income and related per share calculations.

(b) The pro forma adjustments to common stock, additional paid-in capital, and
treasury stock reflect the retirement of shares of UNUM common stock held
in treasury, the reclassification of the Company's

68

common stock on a 0.73 to 1 basis and the reduction in par value of the
Company's common stock from $1.00 to $0.10 which results in 98.7 million
shares issued to replace the 135.2 million shares of the Company's common
stock held by stockholders on December 31, 1998, and the issuance to UNUM
stockholders of 138.7 million shares of UNUMProvident common stock pursuant
to the merger (calculated by multiplying the 138.7 million shares of UNUM
common stock outstanding at December 31, 1998 by the exchange ratio of 1.0
to 1.0 representing the number of shares UNUM stockholders will receive for
each share of UNUM common stock they own immediately prior to consummation
of the merger). The number of shares of UNUMProvident common stock that
will be issued after completion of the merger will be based on the actual
number of shares of UNUM common stock and the Company's common stock (after
the effectiveness of the Provident Reclassification Amendment) outstanding
at the effective time of the merger.

UNUMProvident Unaudited Combined Condensed Pro Forma Consolidated Statements
of Income

Year Ended December 31
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(in millions of dollars, except share data)

Premium Income................ $ 6,189.1 $ 5,317.4 $ 4,327.2
Net Investment Income......... 2,035.4 2,015.7 1,893.4
Net Realized Investment Gains
(Losses)..................... 55.0 11.5 (5.2)
Other Income.................. 299.9 357.0 148.2
-------------- -------------- --------------
Total Revenue............... 8,579.4 7,701.6 6,363.6
-------------- -------------- --------------
Policyholder Benefits......... 5,509.8 4,880.4 4,204.0
Commissions................... 826.5 716.2 555.2
Interest and Debt Expense..... 119.9 84.9 58.5
Increase in Deferred Policy
Acquisition Costs............ (325.8) (236.0) (116.7)
Amortization of Value of
Business Acquired and
Goodwill..................... 66.6 52.7 7.7
Other Operating Expenses...... 1,462.2 1,286.7 1,087.1
-------------- -------------- --------------
Total Benefits and
Expenses................... 7,659.2 6,784.9 5,795.8
-------------- -------------- --------------
Income Before Income Taxes.... 920.2 916.7 567.8
Income Taxes.................. 302.8 299.1 184.2
-------------- -------------- --------------
Net Income.................. $ 617.4 $ 617.6 $ 383.6
============== ============== ==============
Earnings Per Common Share--
Basic........................ $ 2.60 $ 2.62 $ 1.75
Earnings Per Common Share--
Assuming Dilution............ $ 2.54 $ 2.57 $ 1.72
Average Shares Outstanding--
Basic........................ 236,975,177 230,741,174 212,401,523
Average Shares Outstanding--
Assuming Dilution............ 242,348,896 235,818,231 215,301,059

The above unaudited combined condensed pro forma consolidated statements of
income reflect the results of operations of the Company and UNUM combined for
the years presented. No pro forma adjustments have been made to arrive at the
UNUMProvident combined statements of income. Combined pro forma net income
available to common shareholders of $615.5 million, $604.9 million, and $370.9
million for 1998, 1997, and 1996, respectively, was net of preferred stock
dividends of $1.9 million in 1998 and $12.7 million in both 1997 and 1996. The
pro forma combined basic and assuming dilution earnings per share for the
years presented are based on the combined weighted average number of common
and dilutive potential common shares and adjusted weighted shares of the
Company and UNUM. The number of weighted average common shares and adjusted
weighted average shares, including all dilutive potential common shares,
reflects the reclassification of the Company's common stock on a 0.73 to 1
basis and the conversion of each outstanding share of UNUM common stock into
one share of UNUMProvident common stock in the merger.

69

Note 18--Supplemental Data on Quarterly Results of Operations (Unaudited)

The following is a summary of unaudited quarterly results of operations for
1998 and 1997:

1998
-------------------------------------------
4th 3rd 2nd 1st
---------- ---------- ---------- ----------
(in millions of dollars, except share data)

Premium Income.................... $ 587.6 $ 593.2 $ 579.4 $ 587.2
Net Investment Income............. 334.4 329.5 348.3 361.8
Net Realized Investment Gains..... 15.8 9.2 2.8 6.2
Total Revenue..................... 986.1 975.3 983.0 993.6
Income Before Federal Income
Taxes............................ 40.0 125.8 124.1 112.9
Net Income........................ 26.2 81.9 74.8 71.1
Earnings Per Common Share--Basic.. .19 .61 .55 .51
Earnings Per Common Share--
Assuming Dilution................ .19 .59 .54 .50

1997
-------------------------------------------
4th 3rd 2nd 1st
---------- ---------- ---------- ----------
(in millions of dollars, except share data)

Premium Income.................... $ 582.2 $ 594.0 $ 590.0 $ 287.5
Net Investment Income............. 364.6 362.9 364.7 262.5
Net Realized Investment Gains..... 2.0 6.9 1.5 4.7
Total Revenue..................... 991.0 997.1 993.8 571.3
Income Before Federal Income
Taxes............................ 117.3 109.5 90.7 62.8
Net Income........................ 75.8 71.0 59.7 40.8
Earnings Per Common Share--Basic.. .54 .50 .42 .40
Earnings Per Common Share--
Assuming Dilution................ .53 .49 .41 .39

An adjustment of $93.6 million for the anticipated increase in claims
duration considering the impact of the merger with UNUM and an $8.0 million
reserve strengthening for single premium annuities decreased operating results
for the fourth quarter of 1998 by $101.6 million before taxes and $66.0
million ($0.48 per common share assuming dilution) after taxes.

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

None.

70

PART III

Item 10. Directors and Executive Officers of the Registrant

Directors

Following are the names and ages (as of March 1, 1999) of those persons
nominated to be Directors of the Company, as well as their principal
occupations (which have continued for the past five years, unless otherwise
noted), directorships held by them in certain other publicly held companies,
the year in which they became a director of the Company or the Company's
predecessor Provident Life and Accident Insurance Company of America
("America"), and certain other information with respect to such Directors. All
nominees, except Messrs. Bolinder and Watjen, became directors of the Company
on December 27, 1995, the effective date of the Share Exchange between the
Company and America. Mr. Watjen became a director on March 26, 1997. Mr.
Bolinder became a director on March 27, 1997, effective with the closing of
the transaction involving the purchase by Zurich Insurance Company ("Zurich")
or one or more of its affiliates of 19,047,620 (on a post-split basis) shares
of the Company's common stock in connection with financing the Company's
acquisition of The Paul Revere Corporation ("Paul Revere"). Under an agreement
between the Company and Zurich related to the acquisition of Paul Revere,
Zurich has certain rights in connection with designating one person to serve
as director of the Company while Zurich remains the beneficial owner of 5% or
more of the outstanding shares of the Company's common stock.

Each of the persons listed below as a nominee to be a director of the
Company will also be a director of the principal wholly owned subsidiaries of
the Company including Accident, Casualty, National, and Paul Revere, as well
as its principal subsidiary, Paul Revere Life. GENEX Services, Inc ("GENEX")
has a board of directors whose members include some Company board members as
well as other employees of the Company. As the context requires, Company may
include direct and indirect subsidiaries.

Nominees

William L. Armstrong, 62 Director since
1991

From 1979 to 1991, Senator Armstrong served as a Senator from Colorado in
the United States Senate. He has been Chairman of Ambassador Media Corporation
since 1984, Chairman of Cherry Creek Mortgage Company, Inc. since 1991,
Chairman of El Paso Mortgage Company since 1993, Chairman of Centennial State
Mortgage Company, Frontier Real Estate, Inc. and Frontier Title, LLC since
1994, Chairman of Frontier Real Estate since 1994, and Chairman of Transland
Financial Services, Inc. since 1996. He is also a director of Storage
Technology Corporation, and Helmerich and Payne, Inc.

William H. Bolinder, 55 Director since
1997

Mr. Bolinder is a member of the Corporate Executive Board of the Zurich
Insurance Company, headquartered in Zurich, Switzerland. He also serves as
Chairman of the direct life and non-life operations of the Zurich Group in the
U.S. and is a director of many of Zurich's other affiliated companies in the
U.S. The Zurich Group is a leading international insurance organization
providing global coverage in all lines of insurance along with asset
management services.

J. Harold Chandler, 49 Director since
1993

Mr. Chandler became Chairman of the Company April 28, 1996, and President
and Chief Executive Officer and a Director of America, Provident Life Capital
Corporation, Accident and Casualty effective November 8, 1993. Immediately
prior to his employment with Accident, he served as President of NationsBank
Mid-Atlantic Banking Group which includes the NationsBank and Maryland
National Corporation entities in the District of Columbia, Maryland, and
northern Virginia. He formerly served as President of the Citizens and
Southern National Bank of South Carolina, a predecessor company of
NationsBank. He is a director of AmSouth Bancorporation, Herman Miller, Inc.,
and Storage Technology Corporation.

71

Charlotte M. Heffner, 61 Director since
1995

Ms. Heffner is a trustee of The Maclellan Foundation, Inc. She is the sister
of Hugh O. Maclellan, Jr.

Hugh B. Jacks, 64 Director since
1988

Mr. Jacks retired in December 1991 as President and Chief Executive Officer
of BellSouth Services, Incorporated, a provider of lead staff, strategic
planning and support for BellSouth Companies. He is President of Potential
Enterprises, Inc.

Hugh O. Maclellan, Jr., 59 Director since
1975

Mr. Maclellan, Jr. is President of The Maclellan Foundation, Inc., and a
director of SunTrust Bank, Chattanooga, N.A., and Covenant Transport, Inc. Mr.
Maclellan is the brother of Charlotte M. Heffner.

A. S. (Pat) MacMillan, 55 Director since
1995

Mr. MacMillan has served as the Chief Executive Officer of Team Resources,
Inc., since 1980. The company specializes in the areas of team and
organizational design and development, including management consulting,
management training, and organizational audits and surveys. He is also a
trustee of The Maclellan Foundation, Inc.

C. William Pollard, 60 Director since
1992

Mr. Pollard has served as Chairman of the Board of Directors of The
ServiceMaster Company since January 1994. From June 1990 to December 1993 he
served as Chairman and Chief Executive Officer of The ServiceMaster Company.
The ServiceMaster Company provides professional cleaning, termite and pest
control, maid service, lawn care, and appliance and other home equipment and
maintenance, as well as management of plant operations, laundry and linen,
clinical equipment maintenance, and food service for health care, educational
and industrial facilities. He is a director of Herman Miller, Inc.

Scott L. Probasco, Jr., 70 Director since
1962

Mr. Probasco has served as a director and Chairman of the Executive
Committee of SunTrust Bank, Chattanooga, N.A. since 1989. He also serves as a
director of Coca-Cola Enterprises, Chattem, Inc., and SunTrust Banks, Inc.

Steven S Reinemund, 50 Director since
1995

Mr. Reinemund has served as Chairman and Chief Executive Officer of Frito-
Lay, Inc. since June 1992. He served as President and Chief Executive Officer
of Pizza Hut, Inc. from 1986 to 1992. He also serves as a director of PepsiCo,
Inc. and The ServiceMaster Company.

Burton E. Sorensen, 69 Director since
1985

From December 1984 until December 1995, Mr. Sorensen served as Chairman and
Chief Executive Officer of Lord Securities Corp., an investment banking firm.
Prior to that time, Mr. Sorensen was a General Partner of Goldman, Sachs &
Co., investment bankers. He is a director of The ServiceMaster Company.

Thomas R. Watjen, 44 Director since
1997

Mr. Watjen became Vice Chairman of the Company on March 26, 1997, and
retains his position as Chief Financial Officer. He became Executive Vice
President and Chief Financial Officer of America, Provident Life Capital
Corporation, Accident, Casualty, and National on July 1, 1994. Prior to that
time, he served as a Managing Director of the insurance practice of the
investment banking firm, Morgan Stanley & Co., which he joined in 1987.

72

Executive Officers of the Registrant

The executive officers of the Company, all of whom are also executive
officers of its principal subsidiaries, were elected to serve in their
respective offices for one year or until their successors are chosen and
qualified.

Name Age Position
---- --- --------

J. Harold Chandler........... 49 Chairman, President, Chief Executive
Officer, and Director
Thomas R. Watjen............. 44 Vice Chairman and Chief Financial Officer,
and Director
Robert O. Best............... 49 Executive Vice President and Chief
Information Officer/Client Services
F. Dean Copeland............. 59 Executive Vice President and General
Counsel
Thomas B. Heys, Jr. ......... 52 Executive Vice President, Institutional
Sales
Peter C. Madeja.............. 40 Executive Vice President and President and
CEO of GENEX Service, Inc.
Ralph A. Rogers, Jr. ........ 50 Senior Vice President and Treasurer

Mr. Chandler became Chairman of the Company April 28, 1996, and President
and Chief Executive Officer and a Director of the Company effective November
8, 1993. Immediately prior to his employment with the Company, he served as
President of NationsBank Mid-Atlantic Banking Group which includes the
NationsBank and Maryland National Corporation entities in the District of
Columbia, Maryland, and northern Virginia. He formerly served as President of
the Citizens and Southern National Bank of South Carolina, a predecessor
company of NationsBank. He is a director of AmSouth Bancorporation, Herman
Miller, Inc., and Storage Technology Corporation. He is currently a member of
the Board of Trustees of Wofford College.

Mr. Watjen became Vice Chairman and Chief Financial Officer of the Company
on March 26, 1997. He became Executive Vice President and Chief Financial
Officer on July 1, 1994. Prior to joining the Company, he served as a Managing
Director of the insurance practice of the investment banking firm, Morgan
Stanley & Co., which he joined in 1987.

Mr. Best became an Executive Vice President of the Company on May 7, 1997.
He became Senior Vice President and Chief Information Officer of the Company
on July 11, 1994. He was previously Senior Vice President and Chief
Information Officer at UNUM Corporation, which he joined in 1993 following
UNUM's acquisition of Colonial Life and Accident Insurance Company. At
Colonial, he served as Vice President, Operations and Information Systems,
until 1992 when he was named Executive Vice President.

Mr. Copeland became Executive Vice President and General Counsel of the
Company on May 12, 1997. Prior to joining the Company he had been a partner
since 1972 in the law firm of Alston & Bird, where he concentrated primarily
on matters related to consolidation within the financial services industry.

Mr. Heys became an Executive Vice President of the Company on May 7, 1997.
He became a Senior Vice President, Corporate Risk Management, of the Company
in August 1994. He served as Vice President and Chief Officer of various
operating departments from November 1990 until August 1994.

Mr. Madeja became an Executive Vice President of the Company on May 7, 1997.
He became Senior Vice President of the Company in February 1997 when the
Company acquired GENEX. He continues to serve as President and Chief Executive
Officer of GENEX, which he joined in 1982.

73

Mr. Rogers became Senior Vice President and Treasurer of the Company on May
7, 1997. Prior to this position he served as Vice President and Controller of
the Company since 1984.

Compliance With Section 16(a)

Under Section 16(a) of the Exchange Act, the Company's directors, officers,
and 10% beneficial holders of common stock are required to file with the
Securities and Exchange Commission certain forms reporting their beneficial
ownership of and transactions in common stock. Based solely upon information
provided to the Company by each of such persons, the Company believes that
each of its directors, officers and 10% beneficial owners filed all required
reports on a timely basis during the last fiscal year with the following
exceptions: Mr. Madeja, an executive officer of the Company, purchased shares
on the open market in October which were not reported on Form 4 in a timely
fashion.

Item 11. Executive Compensation

The named executive officers of the Company work primarily for Accident,
except for Mr. Madeja, who serves as President, GENEX, and also provide
services to the other subsidiaries under a general services agreement between
the Company and the respective subsidiaries.

Report of the Compensation Committee

The Compensation Committee of the Board of Directors (the "Committee") is
composed entirely of non-employee directors. The Committee is responsible for
establishing and administering the Company's executive compensation programs.
This report addresses the Company's compensation policies and practices, and
the Committee's decisions regarding 1998 compensation and long-term incentive
as they affected the Chief Executive Officer and the four other most highly
paid executive officers of the Company (the five individuals collectively
called the "Named Executive Officers"). These policies and practices also
generally affect the compensation of the Company's other officers and high
level executives.

Executive Compensation Policies

The Committee is responsible for establishing and administering the
Company's executive compensation programs. The Committee establishes
compensation according to the following guiding principles:

(a) Compensation should be directly linked to the Company's operating and
financial performance.

(b) Total compensation should be competitive when compared to
compensation levels of executives of companies against which the Company
competes for management.

(c) Performance-related pay should be a significant component of total
compensation, placing a substantial portion of an executive's compensation
at risk.

(d) Stock ownership guidelines and programs should encourage significant
stock ownership in the Company by its executives to align their interests
with the interests of stockholders.

Stock Ownership Requirement

The foundation for the Company's executive compensation program is ownership
of the Company's common stock by members of the senior management group. This
ownership requirement, involving a substantial portion of each executive's net
worth, is intended to motivate the executive to think and act like a
stockholder, and to assume responsibility for profitability and improving
total stockholder return. The stock ownership requirement can be met with
shares beneficially owned by the executive, through purchase of shares via the
Employee Stock Purchase Plan, exercise of stock options, shares allocated to
the executive through the Company's 401(k) retirement plan (MoneyMaker),
phantom shares or restricted stock issued under the annual incentive
compensation plan through the Performance Share Subplan, restricted stock
awards, or open market purchases from personal funds. Unexercised stock
options do not apply toward the ownership requirement.

74

Base Salary

A competitive base salary program is necessary to attract and retain key
executives. It is the Company's practice to establish executive salaries at a
conservative level relative to the median for salaries for comparable
positions in other companies in its competitor group. For the named executive
officers other than the CEO (see "CEO Compensation" below), one of the
executive's 1998 base salary was above the median and three of these
executives' 1998 base salaries were below the median.

The companies in the competitor group are life, health and multi-line
insurance companies that the Company has determined are its primary
competitors for key executives. (For compensation purposes the competitor
group is comprised of a size, measured by assets, comparable to the Company
that competes with the Company for business and key executives. This is a
smaller group of companies than is included in the "Insurance Index" used for
"Comparison of Five-Year Cumulative Total Return" chart below. The group of
companies in the "Insurance Index" is comprised of firms the Committee has
determined are competing with the Company in the capital markets and includes
some companies which are not included in the compensation comparison.)

Merit increases in salary generally are awarded annually by the Committee,
based primarily on an assessment of the Company's position relative to
competitors and on an appraisal of the executive's contribution. The
assessment of salary position relative to competitors is performed by use of a
national survey of the competitor group of life and health insurance companies
as described above, conducted by a recognized compensation consulting firm and
also by use of internally generated surveys of data gathered from proxy
statements. Salary levels for 1998 were established by the Committee following
the policies described.

Annual Incentive Compensation

Annual incentive awards in 1998 for all officers were based on performance
measures included in the Amended and Restated Annual Management Incentive
Compensation Plan of 1994 ("MICP"). The annual incentive portion of the MICP
includes the Corporate Performance Subplan and the Individual Performance
Subplan.

The Corporate Performance Subplan of the MICP is based solely on the
achievement of objective corporate performance goals. At the beginning of each
plan year, the Committee establishes measurable performance goals based on one
or more corporate performance criteria, and establishes target awards and any
formula for payouts in excess of target based on the achievement of these
goals. Target awards under the Corporate Performance Subplan are set by the
Committee as percentages of base salary, which percentages may differ from
participant to participant and from year to year. Under the Corporate
Performance Subplan, the three performance measures for 1998 were Return on
Equity, Sales Growth and Relative Stock Performance. The Committee established
stretch targets for 1998 for the Corporate Performance Subplan. Above target
payouts resulted for certain executives due to payments under the Individual
Performance Subplan.

The Individual Performance Subplan of the MICP is based on an individual's
contribution to the business of the Company, as determined by the Committee.
This contribution may be assessed on non-objective as well as objective
measures. Awards are payable under this subplan, also based on percentages of
salary.

Based on 1998 results, awards under the MICP to the Named Executive Officers
ranged from 43% of salary to 110% percent of salary.

Long-Term Incentive Compensation

Stock Plan of 1994

This Plan permits the grant to executive officers and certain other key
employees of restricted stock, stock appreciation rights and options to
purchase shares of the Company's common stock. The purposes of this Plan are
to encourage and enable the acquisition of a financial interest in the Company
by key employees and to reward key employees for the long-term growth in the
market value of the stock. On January 13, 1997, each Named Executive, except
Mr. Copeland and Mr. Madeja, was granted an option which was expected to cover
the three year period from 1997 to 1999. Mr. Copeland was granted an option
upon his employment in May

75

1997 which was expected to cover the three year period as well. As shown in
the tables following this report, Mr. Madeja was granted options on January 7,
1998. The Committee approved no other grants under the Stock Plan of 1994 to
any Named Executive Officer in 1998.

CEO Compensation

Compensation of the Chief Executive Officer follows the general principles
for executive compensation as set forth above. Specific applications of these
principles to Mr. Chandler's pay for 1998 were as follows:

Base Salary

Base salary for Mr. Chandler was set pursuant to his employment agreement
described in the 1994 proxy statement and will be reviewed annually and
adjusted as deemed appropriate by the Committee. For 1998, Mr. Chandler's
salary was increased to a level reflecting pay of chief executive officers of
companies in the Company's competitor group.

Annual Incentive Compensation

For 1998, Mr. Chandler received an annual incentive under the MICP of
$960,000. Of this total, $688,000 was paid under the Corporate Performance
Subplan (86% of his base salary) and $272,000 was paid under the Individual
Performance Subplan (34% of his base salary) for the achievement of goals
established by the Committee which were specific to Mr. Chandler.

Stock Plan of 1994

The Committee believes that it is appropriate to make stock option grants to
the CEO at a higher multiple of salary than for other senior executives. This
higher level of award is in recognition of the higher level of responsibility
and accountability of the CEO and also to produce compensation at a level
comparable to competitor companies. On January 13, 1997, Mr. Chandler was
granted options to purchase 1,200,000 shares of Company common stock, as
approved by the Committee in January 1997 and previously reported in the Proxy
Statement for the Annual Meeting of Stockholders held May 7, 1997.

Million Dollar Deduction Limitation (IRC Section 162(m))

Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), limits the Company's ability to deduct compensation in excess of
$1,000,000 paid during a tax year to the Chief Executive Officer and the four
other highest paid executive officers at year end. Certain performance-based
compensation is not subject to such deduction limit. Annual bonuses under the
Corporate Performance Subplan of the MICP are designed to meet the criteria of
"performance-based" compensation that is fully deductible under Code Section
162(m), as are awards of stock options under the Company's Stock Plan of 1994.
It is the Committee's intent to maximize the deductibility of executive
compensation while retaining the discretion necessary to compensate executive
officers in a manner commensurate with performance and the competitive market
of executive talent.

Conclusion

The Company's compensation program described above closely links pay with
performance and the creation of stockholder value. The Committee believes that
the program has been and will continue to be successful in supporting the
Company's financial, growth and other business objectives.

Hugh B. Jacks, Chairman
A.S. MacMillan
C. William Pollard
Scott L. Probasco, Jr.
Steven S Reinemund

76

The following table summarizes the compensation of the Chief Executive
Officer and the four other most highly compensated executive officers (the
"Named Executive Officers") for the years 1996, 1997, and 1998.

SUMMARY COMPENSATION TABLE

Annual Compensation Long Term Compensation
------------------------------------ -----------------------------------
Awards Payouts
------------------------ -------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Compensation Award(s) Options Payouts Compensation
Principal Position Year Salary ($) Bonus ($) ($) ($)(8) (#) (10) ($) ($)
------------------ ---- ---------- --------- ------------ ---------- ---------- ------- ------------

J. Harold Chandler 1998 828,846 960,000(3) 0 368,571(8) 0 0 2,917(11)
President/CEO 1997 736,539 922,500 0 4,590,670 1,200,000 0 1,615
1996 686,539 1,076,157 0 309,000 400,000 0 2,375

Thomas R. Watjen 1998 519,231 550,000(4) 0 129,576(8) 0 0 2,400(11)
EVP/CFO 1997 461,539 500,000 0 1,559,152 500,000 0 0
1996 418,269 427,164 0 105,888 100,000 0 0

F. Dean Copeland(1) 1998 272,116 300,000(5) 0 63,348(8) 0 0 2,063(11)
EVP/General 1997 153,846 151,875 0 55,938 200,000 0 0
Counsel 1996 0 0 0 0 0 0 0

Robert O. Best 1998 259,616 187,875(6) 0 18,141(8) 0 0 3,160(11)
EVP/CIO 1997 230,962 150,000 0 80,045 150,000 0 2,375
1996 217,308 113,685 0 18,271 40,000 0 2,375
Peter C. Madeja 1998 225,000 106,750(7) 0 10,366(9) 25,000
EVP/President, 1997 227,346 92,156 0 83,344 50,000
GENEX 1996 0 0 0 0

- --------
(1) Mr. Copeland became Executive Vice President and General Counsel of the
Company on May 12, 1997.
(2) Mr. Madeja became Executive Vice President of the Company on February 28,
1997 when the Company acquired GENEX.
(3) Bonus comprised of $960,000 Incentive Bonus of which $860,000 was deferred
in the form of phantom shares and accounted for under the Performance
Share Plan.
(4) Bonus comprised of $550,000 Incentive Bonus of which $302,344 was deferred
in the form of phantom shares and accounted for under the Performance
Share Plan.
(5) Bonus comprised of $250,000 Incentive Bonus of which $147,813 was deferred
in the form of phantom shares and accounted for under the Performance
Share Plan and $50,000 Transition Signing Bonus.
(6) Bonus comprised of $162,875 Incentive Bonus of which $42,328 was deferred
in the form of phantom shares and accounted for under the Performance
Share Plan. Additionally, Mr. Best was awarded a $25,000 Key Contributor
Award for year 2000 initiatives which was paid in the form of stock with a
3 year restriction on sale.
(7) Bonus comprised of $106,750 Incentive Bonus of which $24,187 was deferred
in the form of phantom shares and accounted for under the Performance
Share Plan.
(8) As of December 31, 1998, the Named Executive Officers held the following
aggregate shares of restricted stock, with the following values (based on
December 31, 1998 closing price of $41.50 per share): Mr. Chandler,
150,000 shares valued at $6,225,000; Mr. Watjen, 50,000 shares valued at
$2,075,000; Mr. Copeland, 2,000 shares valued at $83,000; Mr. Best, 2,000
shares valued at $83,000; and Mr. Madeja, 2,000 shares valued at $83,000.
Dividends are paid on the restricted shares. Additionally, each Named
Executive Officer held premium phantom shares which were issued in
February 1998 under the Performance share Plan upon deferral of the 1997
incentive award into phantom

77

shares. The phantom shares are subject to risk of forfeiture for three
years. The number of phantom shares held along with their value as of
December 31, 1998 are as follows: Mr. Chandler, 23,843 shares valued at
$989,485; Mr. Watjen, 8,922 shares valued at $370,263; Mr. Copeland, 1,939
shares valued at $80,469; Mr. Best, 1,432 shares valued at $59,428.
(9) This amount represents premium phantom shares issued in February 1999
under the Performance Share Plan upon deferral of the 1998 incentive award
into phantom shares. These phantom shares are subject to risk of
forfeiture for three years.
(10) Share amounts have been adjusted to reflect the 2 for 1 stock split on
September 30, 1997 which was in the form of a 100% stock dividend.
Additionally, the amounts for Mr. Watjen exclude the option of which he
relinquished ownership and economic interest pursuant to a domestic
relations order in January 1997. This includes 100,000 from the 1996
grant and 100,000 from the 1997 grant. On January 13, 1997, Messrs.
Chandler, Watjen and Best were granted an option which was expected to
cover the three year period from 1997 to 1999. Mr. Copeland was granted
and option in May 1997, upon employment which was expected to cover the
three year period as well. Mr. Madeja was granted 25,000 options on
January 7, 1998.
(11) The amounts reported for Messrs. Chandler, Best, and Heys include the
Company's match of their respective contributions to the MoneyMaker, a
long-term 401(k) retirement plan ("MoneyMaker") along with a supplemental
match of $517, $760, and $359 respectively based on Company performance
during 1997. The amounts reported for Mr. Watjen and Mr. Copeland include
only the Company's match of their respective contribution to the
MoneyMaker. Additionally, the amount reported for Mr. Madeja includes
$5,178 which reflects the full dollar value of the premium on a Key Man
Life Insurance for which the Company pays the premium.

The following table describes the options granted to the named individuals
for 1998:

Option Grants In Last Fiscal Year

Individual Grants Grant Date Value
--------------------------------------------------- ----------------
Number of
Securities % of Total
Underlying Options Granted Exercise
Options Granted to Employees in Price Expiration Grant Date
Name (#)(1) Fiscal Year ($/sh) Date Value(2)
---- --------------- --------------- -------- ---------- ----------------

J. Harold Chandler...... 0
Thomas R. Watjen........ 0
Robert O. Best.......... 0
F. Dean Copeland........ 0
Peter C. Madeja......... 25,000 2.48 $37.625 01/06/08 $265,625

- --------
(1) Options granted are non-qualified stock options. With the exercise price
equal to fair market value on the date of the grant. All options were for
Company common stock. To encourage increased ownership, the Plan includes
what is commonly referred to as a "reload" feature. Under this
arrangement, when options are exercised, payment for the option shares by
delivery of shares already owned by the optionee would entitle the
optionee to a new stock option grant equal to the number of shares
delivered. The new option grant acquires the remaining exercise period
with respect to the options exercised and the option price is equal to the
then-current fair market value of the common stock.
(2) The grant date present value of options granted in 1998 was determined
using the Black-Scholes option pricing model. The underlying assumptions
were as follows:

Volatility. Volatility for Provident's common stock was calculated using
32 quarterly days stock prices for Mr. Madeja's grant. The volatility was
18.8% for Mr. Madeja grant.

Risk-Free Rate of Return. Rates of return were based on U.S. Treasury
strip rates of return for an investment whose term is equal to the time of
exercise of the option (as defined below). The rate for Mr. Madeja's grant
was 5.57%.

78

Dividend Payout Rate. The dividend payout rates were determined by
dividing the expected annual dividend rate by the exercise price.

Time of Exercise. The time of exercise was assumed to be 8 years from the
date of grant for Mr. Madeja's grant. A discount of 15% was applied in
determining the grant date present value of these options to recognize the
risk of forfeiture.

(3) The options granted to Mr. Madeja vest on January 7, 2000. Options expire
on the earliest of the following dates: (a) upon termination of employment
other than by death or disability; (b) three years after the date of death
or disability; (c) five years after the date of normal retirement or early
retirement with Committee approval; or (d) ten years after the date of the
grant. In the event of a change in control, options would become
immediately exercisable, or the Compensation Committee can exercise its
discretion to cash out any unvested options.

The following table shows information concerning options for Company common
stock exercised by the named individuals during 1998 and the value of
unexercised options held by the named individuals at December 31, 1998:

Aggregated Option Exercises In Last Fiscal Year
and FY-End Option Value

Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at FY-End (#) FY-End ($)
---------------------- -----------------------
Shares Acquired Exercisable/ Exercisable/
Name on Exercise(#) Value Realized($) Unexercisable(1) Unexercisable(2)
---- --------------- ----------------- ---------------------- -----------------------

J. Harold Chandler...... 600,000 13,701,242 1,400,000/1,200,000 $40,887,500/$21,337,440

Thomas R. Watjen(3)..... 0 0 350,000/450,000 9,442,180/8,001,540

F. Dean Copeland........ 0 0 50,000/150,000 734,375/2,203,125

Robert O. Best.......... 61,000 1,517,375 131,000/120,000 3 ,435,124/2,133,744

Peter C. Madeja......... 0 0 50,000/75,000 912,500/543,750

- --------
(1) Share amounts have been adjusted to reflect the 2 for 1 stock split on
September 30, 1997 which was in the form of a 100% stock dividend.
(2) Calculated as the difference between the fair market value of a share of
Company Common Stock on December 31, 1998 ($41.50) and the exercise price
of the options.
(3) The amounts for Mr. Watjen exclude 300,000 options of which he
relinquished ownership and economic interest pursuant to a domestic
relations order in January 1997. In 1997, 100,000 of those options were
exercised at a value of $1,409,375. The value of the remaining options
transferred pursuant to the domestic relations order, all of which are
exercisable, is $5,656,250.

79

Pension Plan Table

The following table shows the estimated annual aggregate benefits payable at
normal retirement under the tax-qualified, defined benefit Retirement Plan for
Salaried Employees for various combinations of compensation and years of
service:

1998 Estimated Annual Benefit for
Average Base Representative Years of Service Credit
Salary in Five ------------------------------------------------------------------
Consecutive 15 20 25 30
Highest Paid Years Years Years Years Years
------------------ ------- ------- ------- -------

$ 150,000 $37,752 $53,052 $60,852 $68,652
175,000 45,252 63,048 72,108 81,156
200,000 52,752 73,056 83,352 93,648
225,000 60,252 83,052 94,608 106,152
250,000 67,752 93,048 105,852 118,656
300,000 82,752 113,052 128,352 143,652
350,000 97,752 133,056 150,852 168,648
400,000 112,752 153,048 173,352 193,656
450,000 127,752 173,052 195,852 218,652
500,000 142,752 193,056 218,352 243,648

Benefits are based on the average base salary earned during the five
consecutive years of highest compensation preceding retirement date plus $5
per each year of service subject to a maximum of 30 years, subject to a
partial offset for the Social Security benefits to which the participant is
entitled upon retirement. Credit for years of service cease after 30 years. A
reduction of 4% per year is applied for retirement before age 62. As of
December 31, 1998, Messrs. Chandler, Watjen, Copeland, Best, and Madeja had
approximately 5, 4, 2, 4 and 2 years of credited service, respectively.

The Company also provides a Supplemental Executive Retirement Plan ("SERP")
pursuant to which certain current officers of the Company may be entitled to
retirement benefits in addition to those that may be funded or paid through a
tax-qualified plan such as the Retirement Plan. Such benefits are not included
in the Pension Plan Table above. Generally, participants in the SERP become
entitled to benefits upon retirement at or after age 65, age 55 with 20 years
of service or age 62 with consent of the Compensation Committee of the Board
of Directors. The maximum annual amount of such additional benefits is the
greater of (a) 50 percent of the average of the participant's compensation for
the five highest consecutive calendar years of active service with Provident
(which will be achieved when the participant has 20 years of service), plus
$1,800, offset by the benefits payable under the Retirement Plan and certain
social security benefits; or (b) the difference between the benefits which are
payable under the Retirement Plan and the benefits which would be payable
under the Retirement Plan to the participant without the limitations on annual
benefits imposed by Section 415 of the Internal Revenue Code of 1986, as
amended (the "Code") (for 1998, $160,000). Proportionately smaller
supplemental retirement benefits are payable under the SERP upon retirement
before age 65. Mr. Chandler will be covered under the Retirement Plan for
Salaried Employees, the SERP, and the supplemental retirement benefit ("SRB")
described in his employment agreement.

Severance Agreement

The Company offers severance agreements to certain other of its key
executives as determined by the Board of Directors acting on the
recommendation of the Compensation Committee. While agreements can vary
slightly in details, the basic arrangements require the Company to make
certain payments and provide certain benefits in the event that the
executive's employment terminates for any reason except death, disability,
retirement, or of good cause by the Company or without good reason by the
executive within two years following a change of control as that term is
defined above. The amounts and benefits are (1) a multiple of one to three
times the executive's annual base salary at the highest rate in effect at any
time immediately prior to the change in control until the termination date;
(2) participation at no additional direct costs to the executive in the life,
accident and health insurance plans in effect prior to the change in control
(or equivalent benefits) for one to three years following the termination
date; (3) up to $10,000 of reasonable expenses associated with outplacement
through a professional placement firm for a period of not more than one year.
In addition, each is entitled to death or long-

80

term disability benefits no less favorable than those to which the executive
would have been entitled if death or termination for disability occurred
within six months prior to the change in control. Messrs. Watjen, Copeland,
and Best entered into agreements providing the amounts and benefits described
above.

Employment Contract

J. Harold Chandler has an agreement with the Company by which he became
President and Chief Executive Officer of the Company, Capital, Provident and
Casualty effective November 8, 1993. The period of employment covered by the
Agreement is one year with automatic extensions for additional one year terms
unless either party terminates the Agreement. Compensation under the Agreement
includes (i) a base annual salary of $650,000, subject to being increased
annually upon recommendation of the Compensation Committee; (ii) a transition
bonus of $130,000; (iii) a special bonus of $170,000; (iv) an annual incentive
bonus for 1993 of not less than $200,000; (v) 29,216 shares of restricted
Class B Common Stock, 7,304 shares of which became vested and unrestricted on
December 31, 1993, and 7,304 shares of which shall become unrestricted by
vesting and being delivered on each December 31 of 1994, 1995, and 1996; (vi)
a grant of options for 190,000 shares of Class B Common Stock on November 8,
1993 (having a two year vesting and a five year exercise period); (vii) a
grant of options on January 6, 1994 for 110,000 shares of Class B Common Stock
(having a two year vesting and a five year exercise period); and (viii) such
other options or other stock grants to be recommended by the Compensation
Committee from time to time over a ten year period beginning November 8, 1993
within the terms of the approved stock option plan then in effect for
approximately an additional 700,000 shares of Class B Common Stock. The
Agreement states the intent of the Company and Mr. Chandler that he have the
opportunity to acquire 2 - 3% of the Company's outstanding Common Stock. The
Agreement also grants eligibility to participate in the Employer's Retirement
Plan for Salaried Employees ("Qualified Plan") and the Supplemental Executive
Retirement Plan ("SERP"). In addition, a supplemental retirement benefit
("SRB") calculated using the SERP formula applied to the annual base salary
will be provided. Rights to receive the SRB will vest at 10% per year provided
that employment continues for five years. Generally, if employment is
terminated prior to the expiration of the five year period none of the SRB
will be payable. Any SRB payments will be reduced by amounts paid under the
other plans listed in this paragraph and any qualified or nonqualified
retirement benefit paid by Mr. Chandler's previous employer. The Company
agreed to pay reasonable relocation expenses including the purchase of Mr.
Chandler's former house. Certain other benefits including club memberships and
up to $10,000 in 1993 and $4,000 in each year of employment thereafter for
personal financial planning were also included.

Change In Control

For purposes of accelerating benefits under one or more of the incentive
compensation plans (annual and stock option), and for purposes of the
severance agreements for certain executive officers, and for purposes of
certain termination provisions in Mr. Chandler's employment contract described
below, a change in control will be deemed to have occurred if either of the
following sets of events happen: (a) both (i) the Maclellan family holdings
must fall below 30 percent of the outstanding stock of the Company, and (ii)
concurrently at least 30 percent of the outstanding stock of the Company must
be owned by a person or group other than the Maclellan family; or (b)
stockholders approve (i) a merger or consolidation of the Company in which the
Company is not the surviving entity, (ii) a plan of complete liquidation of
the Company, or (iii) an agreement for the sale of or disposition of all or
substantially all of the assets of the Company.

If within 24 months following a change in control as defined above, Mr.
Chandler voluntarily resigns or retires or his employment is terminated except
for disability, death or cause, benefits include (i) payment of 299% of Mr.
Chandler's average (for the preceding years of service up to five years of
such prior service) base salary and annual incentive bonus; (ii) vesting of
unvested options and restricted stock as of the date of such termination; and
(iii) a cash payment equal to the value of any options anticipated to be
granted during the three years following such termination.

81

Termination of Employment

Mr. Chandler's employment agreement provides benefits in the event of a
termination for the following reasons:

Disability: Benefits include (i) payment of base salary for two years
from the date of notice of termination; (ii) full vesting of nonvested
restricted stock, stock options and other equity awards and of SRB
benefits; (iii) two annual payments each equal to the average of the annual
incentive bonus received for the two years prior to the year in which the
notice of termination is given, less any amounts paid to Mr. Chandler under
the Company's disability plan. In addition, the Company will continue to
provide, for a period of two years from the date of the notice of
termination, such health benefits and life insurance benefits as were in
effect immediately prior to such termination for disability.

Death: Benefits include (i) the amount of base salary which would have
been paid for the remainder of the year in which death occurs; (ii) the sum
of any unpaid transition, special and annual incentive bonuses which would
have been payable during the period of employment; (iii) vesting of granted
but unvested stock options or other equity awards and of SRB benefits.

Cause: Only earned but unpaid base salary through the date of termination
for cause will be paid, while all nonvested benefits held as of the date of
such termination shall be canceled as of such date.

Voluntary resignation or retirement: Benefits include (i) earned but
unpaid base salary through the date of voluntary resignation or retirement;
(ii) such health benefits and life insurance benefits as were in effect
immediately prior to such termination; and such other payments or benefits
as may be negotiated.

Without cause: Benefits include (i) payment of up to $2,250,000 less the
total of all base salary and annual incentive bonus received from November
8, 1993, to the effective date of the termination, but in no event would
the total payable be greater than two times the sum of the then current
base salary and target annual incentive bonus for the year in which such
termination occurs; (ii) for a period of two years from the date of the
notice of termination, such health benefits and life insurance benefits as
were in effect immediately prior to such termination; immediate and full
vesting of all unvested stock options and other equity awards as well as
the SRB benefit.

Change in control: If within 24 months following a change in control as
defined above, Mr. Chandler voluntarily resigns or retires or his
employment is terminated except for disability, death or cause, benefits
include (i) payment of 299% of Mr. Chandler's average (for the preceding
years of service up to five years of such prior service) base salary and
annual incentive bonus; (ii) vesting of unvested options and restricted
stock as of the date of such termination; and (iii) a cash payment equal to
the value of any options anticipated to be granted during the three years
following such termination.

Compensation Committee Interlocks And
Insider Participants In Compensation Decision

During 1998:

1. No member of the Compensation Committee:

(a) was an employee or officer of the Company or any of its subsidiaries;
or

(b) had any relationship requiring disclosure under Item 404 of
Regulation S-K.

2. No executive officer of the Company served as a:

(a) member of a compensation committee (or its equivalent or the board of
directors in the absence of such a committee) of another entity, one
of whose executive officers served on the Company's Compensation
Committee or was a director of the Company; and

(b) director of an entity, one of whose executive officers served on the
Company's Compensation Committee.

82

COMPANY PERFORMANCE

The following graph shows a five year comparison of cumulative total returns
for the Common Stock of the Company (NYSE symbol: PVT), Class B Common Stock
of America (NYSE symbol: PVB), the Class A Common Stock of America (NYSE
symbol: PVA), the S&P Composite Index, and the Insurance Index (non-weighted
average of "total returns" from the S&P Life Index and the S&P Multi-line
Index.) Effective December 27, 1995, all shares of America were exchanged for
shares of the Company.

Comparison of Five Year Cumulative Total Return
PVT, PVB, PVA, S&P 500, Insurance Index

Assumes $100 invested in each at December 1993 with dividends reinvested

The following table contains the values used to plot the performance graph
above:

Dec. 1993 Dec. 1994 Dec. 1995 Dec. 1996 Dec. 1997 Dec. 1998
--------- --------- --------- --------- --------- ---------

PVA................ $100.00 $ 78.10 $131.06 $190.84 $308.67 $335.28
PVB................ $100.00 $ 73.30 $117.44 $170.99 $276.56 $300.39
Insurance Index.... $100.00 $ 94.07 $136.86 $170.79 $240.51 $260.78
S&P 500............ $100.00 $101.32 $139.40 $171.40 $228.59 $293.91

83

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding the beneficial
ownership of the Company common stock as of March 1, 1999, by each director,
nominee and named executive director, and by all directors, nominees and
executive officers of the Company as a group. The number of shares include
those which are deemed to be beneficially owned under applicable Securities
and Exchange Commission Regulations. Unless otherwise indicated, the person
indicated holds sole voting and dispositive power.

Shares Beneficially
Owned Subject % of
Shares To Options Total Shares Provident
Beneficially Exercisable as of Beneficially Common
Person Owned May 1, 1999 Owned(1) Stock
------ ------------ ------------------- ------------ ---------

J. Harold
Chandler(1)(6)......... 793,962 1,520,000 2,313,962 1.69%
William L. Armstrong.... 6,536 10,000 16,536 *
William H. Bolinder(2).. 3,128 2,500 5,628 *
Charlotte M.
Heffner(3)............. 7,700,862 7,500 7,708,362 5.69
Hugh B. Jacks(2)........ 9,960 0 9,960 *
Hugh O. Maclellan,
Jr.(3)................. 36,201,765 7,500 36,209,265 26.71
A. S. MacMillan(3)...... 902 7,500 8,402 *
C. William Pollard(2)... 16,910 0 16,910 *
Scott L. Probasco,
Jr.(4)................. 782,204 0 782,204 *
Steven S Reinemund...... 3,960 7,500 11,460 *
Burton E. Sorensen(2)... 29,693 0 29,693 *
Thomas R. Watjen(1)(6).. 161,367 450,000 611,367 *
Robert O. Best(1)(6).... 61,442 161,000 222,442 *
F. Dean Copeland(1)(6).. 27,344 50,000 77,344 *
Peter C. Madeja (1)(6).. 8,686 50,000 58,686 *
All directors, nominees
and Executive officers
as a group (17 persons
including the above
named)
(1)(2)(3)(5)(6)........ 45,855,868 2,354,034 48,209,902 34.91

- --------
* Denotes less than one percent.
(1) Includes the following numbers of phantom shares of Provident common stock
representing performance shares awarded under the Performance Share Plan
of the Amended and Restated Annual Management Incentive Compensation Plan.
These performance shares represent deferred compensation based on the
value of the market price of the Company's common stock at the time the
compensation is earned. The performance shares include both shares awarded
and shares resulting from the "gross-up" described in the plan ("premium
shares"). Performance shares cannot be converted into stock for a period
of three years after grant, unless (with respect to the awarded shares
only) the participant terminates employment with the Company. The premium
shares are subject to forfeiture for a period of three years.

Mr. Chandler........................ 117,204 (including 35,160 premium shares)
Mr. Watjen.......................... 43,004 (including 12,901 premium shares)
Mr. Best............................ 6,629 (including 1,988 premium shares)
Mr. Copeland........................ 12,949 (including 3,885 premium shares)
Mr. Madeja.......................... 1,061 (including 318 premium shares)
As a group.......................... 187,116 (including 56,133 premium shares)

(2) Includes the following numbers of shares of phantom Provident common stock
representing deferred share rights awarded under the Provident Companies,
Inc. Non-Employee Director Compensation Plan of 1998;

84

Mr. Bolinder........................................................ 2,312
Mr. Jacks........................................................... 4,344
Mr. Pollard......................................................... 3,352
Mr. Sorensen........................................................ 6,609

(3) Information concerning the nature of the ownership of the securities
listed here may be found below under the heading "Beneficial Ownership of
Provident Securities." Information concerning shares for which ownership
is disclaimed may also be found in that section.

(4) Mr. Probasco has sole voting and investment power with respect to 782,204
shares of Provident common stock. However, he disclaims beneficial
ownership of 350,000 shares of Provident common stock of which he has sole
voting and investment power as these shares are held in a family trust for
the benefit of Mr. Probasco's sister.

(5) Includes 2,000 shares held by Mr. Heys' spouse.

(6) Shares owned by Messrs. Chandler, Watjen, Best, Copeland, and Heys and the
executive officers as a group include shares owned in the MoneyMaker, a
long-term 401(k) Retirement Savings Plan and the Provident Employee Stock
Purchase Plan.

Beneficial Ownership Of Company Securities. Detailed information about the
security ownership of beneficial owners of more than 5% of Provident common
stock is set forth beginning on page 86 including beneficial ownership based
on sole voting and share voting power and investment power. Due to the shared
voting and investment power relating to a large portion of the Company Stock,
there is significant duplication in the reported beneficial ownership. This
results from ownership of certain members of the Maclellan family and trusts
and foundations established by them or for their benefit. The following chart
is provided to summarize the reported Maclellan family interests.

Percent of
Provident
Direct Owned Common Stock
Name and Address of Direct Owner (Voting Power) Outstanding
- -------------------------------- -------------- ------------

The Maclellan Foundation, Inc..................... 15,385,693 11.35
Chattanooga, Tennessee

R. J. and Cora L. Maclellan Trusts................ 6,498,650 4.79
for The Maclellan Foundation
Chattanooga, Tennessee

Charitable Trusts................................. 5,740,994 4.23
Chattanooga, Tennessee

Trusts U/A R. J. Maclellan and.................... 5,082,410 3.75
Trusts U/A Cora L. Maclellan for Families of
H. O. Maclellan, Sr. and R. L. Maclellan
Chattanooga, Tennessee

Trusts U/A H. O. Maclellan, Sr. .................. 4,463,634 3.29
for Children and Grandchildren
Chattanooga, Tennessee

Kathrina H. Maclellan............................. 2,756,283 2.03
Lookout Mountain, Tennessee

Hugh O. Maclellan, Jr. ........................... 1,527,054 1.13
Chattanooga, Tennessee

Charlotte M. Heffner.............................. 915,390 0.68
Atlanta, Georgia

Other (Trusts, Estates and Family Ownership)...... 2,896,548 2.14
Chattanooga, Tennessee

85

The following tables present information about the beneficial owners of the
Company's common stock. Voting power and investment (dispositive) power is
shown separately in the following tables which list those persons holding five
percent (5%) or more of such voting power and those persons holding five
percent (5%) or more of such investment power, respectively. The Company does
not know of any other person that is a beneficial owner of more than five
percent (5%) of common stock.

Beneficial Ownership Based on Voting Power

Amount
Beneficially Percent of Provident
Name and Address of Beneficial Owned(1) Common Stock
Owner (Voting Power) Outstanding
------------------------------ -------------- --------------------

The Maclellan Foundation, Inc...... 15,385,693(2) 11.35
Chattanooga, Tennessee

R. J. and Cora L. Maclellan........ 6,498,650(3) 4.79
Trusts for The Maclellan
Foundation, Inc.
Chattanooga, Tennessee

Hugh O. Maclellan, Jr. ............ 36,201,765(2)(3)(4) 26.70
Chattanooga, Tennessee

Kathrina H. Maclellan.............. 17,911,735(2)(3)(5) 13.21
(Mrs. Robert L. Maclellan)
Lookout Mountain, Tennessee

Dudley Porter, Jr. ................ 9,080,230(3)(6) 6.70
(retired officer of Company)
Chattanooga, Tennessee

Charlotte M. Heffner............... 7,700,862(2)(7) 5.68
(Mrs. Richard L. Heffner)
Atlanta, Georgia

Zurich Insurance Company........... 12,477,620(8) 9.18
Zurich, Switzerland

- --------
(1) Beneficial ownership of securities is disclosed according to Rule 13d-3 of
the Securities Exchange Act of 1934. If shares beneficially owned by more
than one person were shown as beneficially owned by only one person, then
the total number of shares owned by The Maclellan Foundation, Inc.; the R.
J. and Cora L. Maclellan Trusts for The Maclellan Foundation, Inc.;
Kathrina H. Maclellan; Hugh O. Maclellan, Jr.; Dudley Porter, Jr.; and
Charlotte M. Heffner would have been equal to 45,272,016 shares of common
stock (33. 39%).

(2) Trustees of The Maclellan Foundation, Inc. (the "Maclellan Foundation")
were Hugh O. Maclellan, Jr., Kathrina H. Maclellan, Charlotte M. Heffner,
Robert H. Maclellan, A. S. MacMillan, Frank A. Brock, G. Richard Hostetter
and Ronald W. Blue. Hugh O. Maclellan, Jr. held a revocable proxy to vote
the shares of Company common stock held by the Maclellan Foundation.
Accordingly, shares owned by the Maclellan Foundation have been included
among those listed for Hugh O. Maclellan, Jr. The Maclellan Foundation is
a charitable organization treated as a private foundation for federal
income tax purposes.

(3) Trustees of the R. J. Maclellan Trust for the Maclellan Foundation and the
Cora L. Maclellan Trust for the Maclellan Foundation were Hugh O.
Maclellan, Jr., Kathrina H. Maclellan, Dudley Porter, Jr., and SunTrust
Banks, Inc. For information concerning the stock ownership of SunTrust
Banks, Inc., see Footnote 12 under "Beneficial Ownership Based on
Investment Power." Voting power with respect to shares owned by these
trusts was held by Hugh O. Maclellan, Jr., Kathrina H. Maclellan and
Dudley Porter, Jr. The R. J. and Cora L. Maclellan Trusts for the
Maclellan Foundation are charitable organizations treated as private
foundations for federal income tax purposes.

86

(4) Hugh O. Maclellan, Jr. had the power to vote the following shares of
common stock:

Sole Voting Power.................................. 4,268,366 Shares--3.15%
Shared Voting Power................................ 31,933,399 Shares--23.55%
-------------------------
Total............................................ 36,201,765 Shares--26.70%

Totals listed above, and below under "Beneficial Ownership Based on
Investment Power", do not include 85,128 shares of common stock voted
solely by spouse, Nancy B. Maclellan, of which beneficial interest is
disclaimed. Also totals do not include options to purchase 7,500 shares of
common stock which are exercisable within 60 days of March 1, 1999.

(5) Kathrina H. Maclellan had the power to vote the following shares of common
stock:

Sole Voting Power.................................. 2,756,283 Shares--2.03%
Shared Voting Power................................ 15,155,452 Shares--11.18%
------------------------
Total............................................ 17,911,735 Shares--13.21%

(6) Dudley Porter, Jr. had the power to vote the following shares of common
stock:

Sole Voting Power.................................... 5,360 Shares--0.00%
Shared Voting Power.................................. 9,074,870 Shares--6.70%
----------------------
Total.............................................. 9,080,230 Shares--6.70%

Totals listed above, and below under "Beneficial Ownership Based on
Investment Power", do not include 41,852 shares of common stock voted
solely by spouse, Mary M. Porter, of which beneficial interest is
disclaimed.

(7) Charlotte M. Heffner had the power to vote the following shares of common
stock:

Sole Voting Power.................................... 2,401,460 Shares--1.77%
Shared Voting Power.................................. 5,299,402 Shares--3.91%
----------------------
Total.............................................. 7,700,862 Shares--5.68%

Totals listed above, and below under "Beneficial Ownership Based on
Investment Power," do not include 65,664 shares of common stock voted
solely by spouse, Richard L. Heffner, of which beneficial interest is
disclaimed. Also totals do not include options to purchase 7,500 shares of
common stock which are exercisable within 60 days of March 1, 1999.

With respect to the shares of common stock held by SunTrust Bank, the
Company has been informed that as of March 1, 1999: (a) 6,696,181 shares
(4.94%) were owned by the Maclellan Foundation. and the R. J. and Cora L.
Maclellan Trusts for the Maclellan Foundation; and (b) 7,718,682 shares (5.
69%) were owned by other trusts and charitable organizations within the
Maclellan family. Accordingly, of the shares of common stock reported as
held by SunTrust Bank, Chattanooga, N. A., as of March 1, 1999, an
aggregate of 14,414,863 shares of Provident common stock (10. 63%) were
also included among those listed as beneficially owned by either the
Maclellan Foundation, the R. J. and Cora L. Maclellan Trusts for the
Maclellan Foundation, Kathrina H. Maclellan, Hugh O. Maclellan, Jr., Dudley
Porter, Jr., or Charlotte M. Heffner.

(8) Zurich Insurance Company has sole voting power of 12,447,620 shares
(9.18%) and sole dispositive power of 6,098,414 shares (4.50%). The shares
as to which Zurich has sole voting power are owned by Zurich and a number
of its wholly-owned subsidiaries, with the exception of 6,349,206 shares
which are owned by Longfellow I, LLC. Under the Stock Purchase Agreement
dated March 27, 1997, between Longfellow and Zurich, Longfellow granted
Zurich a proxy to vote the shares of the Company stock held by Longfellow.

87

BENEFICIAL OWNERSHIP BASED ON INVESTMENT POWER

Amount Percent of Provident
Name and Address of Beneficial Beneficially Owned(1) Common Stock
Owner (Investment Power) Outstanding
- ------------------------------ --------------------- --------------------

The Maclellan Foundation, Inc. ... 15,385,693(2) 11.35
Chattanooga, Tennessee

R. J. and Cora L. Maclellan....... 6,498,650 4.79
Trusts for The Maclellan
Foundation, Inc.
Chattanooga, Tennessee

Hugh O. Maclellan, Jr............. 36,201,765(2)(3) 26.70
Chattanooga, Tennessee

Kathrina H. Maclellan............. 33,297,428(2)(4) 24.56
(Mrs. Robert L. Maclellan)
Lookout Mountain, Tennessee

Charlotte M. Heffner.............. 23,210,035(2)(5) 17.12
(Mrs. Richard L. Heffner)
Atlanta, Georgia

Robert H. Maclellan............... 18,458,087(2)(6) 13.61
Lookout Mountain, Tennessee

Dudley Porter, Jr................. 9,080,230(2)(7) 6.70
(retired officer of Company)
Chattanooga, Tennessee

Frank A. Brock.................... 16,273,035(2)(8) 12.00
Lookout Mountain, Tennessee

G. Richard Hostetter.............. 15,391,693(2)(9) 11.35
Chattanooga, Tennessee

A. S. MacMillan................... 15,386,595(2)(10) 11.35
Atlanta, Georgia

Ronald W. Blue.................... 15,385,693(2)(11) 11.35
Atlanta, Georgia

SunTrust Banks, Inc............... 15,179,958 (12) 11.11
Atlanta, Georgia

- --------
(1) Beneficial ownership of securities is listed according to Rule 13d-3 of
the Securities Exchange Act of 1934. If shares beneficially owned by more
than one person were shown as beneficially owned by only one person, then
the total number of shares owned by the Maclellan Foundation; the R. J.
and Cora L. Maclellan Trusts for the Maclellan Foundation; Kathrina H.
Maclellan, Hugh O. Maclellan, Jr.; Charlotte M. Heffner; Robert H.
Maclellan; Dudley Porter, Jr.; Frank A. Brock; G. Richard Hostetter; A. S.
MacMillan; Ronald W. Blue; and SunTrust Banks, Inc. (with respect to the
Maclellan family only) would have been equal 45,671,094 shares of common
stock (33. 68%). The totals shown are for the total Maclellan family
interest only. Shares held by SunTrust Bank which are included in the
totals for the Maclellan family include 14,435,668 shares of common stock.

(2) The 15,385,693 shares of common stock owned by the Maclellan Foundation
also have been included among those listed for Hugh O. Maclellan, Jr.,
Kathrina H. Maclellan, Charlotte M. Heffner, Robert H. Maclellan, A. S.
MacMillan, Frank A. Brock, G. Richard Hostetter and Ronald W. Blue, the
trustees of the Maclellan Foundation, all of whom share investment power
with respect to these shares.

88

(3) Hugh O. Maclellan, Jr. had the power to invest the following shares of
common stock:

Sole Investment Power.............................. 2,624,974 Shares-- 1.94%
Shared Investment Power............................ 33,576,791 Shares--24.76%
-------------------------
Total............................................ 36,201,765 Shares--26.70%

These shares listed above as beneficially owned by Mr. Maclellan based upon
investment power include the 15,385,693 shares of common stock owned by the
Maclellan Foundation and 6,498,650 shares of common stock owned by the R.
J. and Cora L. Maclellan Trust for the Maclellan Foundation. Totals listed
above do not include 85,128 shares of common stock for which his spouse,
Nancy B. Maclellan, had sole investment power, and for which beneficial
ownership is disclaimed. Also totals do not include options to purchase
7,500 shares of common stock which are exercisable at March 1, 1999.

(4) Kathrina H. Maclellan had the power to invest the following shares of
common stock:

Sole Investment Power.............................. 2,756,283 Shares-- 2.03%
Shared Investment Power............................ 30,541,145 Shares--22.53%
-------------------------
Total............................................ 33,297,428 Shares--24.56%

These shares listed above as beneficially owned by Mrs. Maclellan based
upon investment power include the 15,385,693 shares of common stock owned
by the Maclellan Foundation and 6,498,650 shares of common stock owned by
the R. J. and Cora L. Maclellan Trust for the Maclellan Foundation.

(5) Charlotte M. Heffner had the power to invest the following shares of
common stock:

Sole Investment Power.............................. 915,390 Shares-- 0.68%
Shared Investment Power............................ 22,294,645 Shares--16.44%
-------------------------
Total............................................ 23,210,035 Shares--17.12%

These shares listed above as beneficially owned by Mrs. Heffner based upon
investment power include 15,385,693 shares of common stock owned by the
Maclellan Foundation for which Mrs. Heffner had shared investment power.
Totals listed above do not include 65,664 shares of common stock for which
her spouse, Richard L. Heffner, had sole investment power, and for which
beneficial ownership is disclaimed. Also totals do not include options to
purchase 7,500 shares of common stock which are exercisable at March 1,
1999.

(6) Robert H. Maclellan had the power to invest the following shares of common
stock:

Sole Investment Power.............................. 390,246 Shares-- 0.29%
Shared Investment Power............................ 18,067,841 Shares--13.32%
-------------------------
Total............................................ 18,458,087 Shares--13.61%

These shares listed above as beneficially owned by Mr. Maclellan based upon
investment power include 15,385,693 shares of common stock owned by the
Maclellan Foundation.

(7) Dudley Porter, Jr. had the power to invest the following shares of common
stock:

Sole Investment Power................................ 5,360 Shares--0.00%
Shared Investment Power.............................. 9,074,870 Shares--6.70%
-----------------------
Total.............................................. 9,080,230 Shares--6.70%

Totals listed above do not include 41,852 shares of common stock for which
his spouse, Mary M. Porter, had sole investment power, and for which
beneficial ownership is disclaimed.

89

(8) Frank A. Brock had the power to invest the following shares of common
stock:

Sole Investment Power.............................. 1,930 Shares-- 0.00%
Shared Investment Power............................ 16,271,105 Shares--12.00%
-------------------------
Total............................................ 16,273,035 Shares--12.00%

These shares listed above as beneficially owned by Mr. Brock based upon
investment power include 15,385,693 shares of common stock owned by the
Maclellan Foundation.

(9) G. Richard Hostetter had the power to invest the following shares of
common stock:

Sole Investment Power.............................. 6,000 Shares-- 0.00%
Shared Investment Power............................ 15,385,693 Shares--11.35%
-------------------------
Total............................................ 15,391,693 Shares--11.35%

In addition to the 15,385,693 shares of common stock owned by the Maclellan
Foundation for which Mr. Hostetter had shared investment power, Mr.
Hostetter held sole investment and sole voting power for 6,000 shares of
common stock.

(10) A. S. MacMillan had the power to invest the following shares of common
stock:

Sole Investment Power.............................. 902 Shares-- 0.00%
Shared Investment Power............................ 15,385,693 Shares--11.35%
-------------------------
Total............................................ 15,386,595 Shares--11.35%

In addition to the 15,385,693 shares of common stock owned by the Maclellan
Foundation, for which Mr. MacMillan had shared investment power, Mr.
MacMillan held sole investment and sole voting power for 902 shares of
common stock. Also totals do not include options to purchase 7,500 shares
of common stock which are exercisable within 60 days of March 1, 1999.

(11) Ronald W. Blue had the power to invest the following shares of common
stock:

Sole Investment Power.............................. 0 Shares-- 0.00%
Shared Investment Power............................ 15,385,693 Shares--11.35%
-------------------------
Total............................................ 15,385,693 Shares--11.35%

These shares listed above as beneficially owned by Mr. Blue based upon
investment power, include 15,385,693 shares of common stock owned by the
Maclellan Foundation.

(12) SunTrust Banks, Inc. ("SunTrust"), a bank holding company, has informed
the Company that as of March 1, 1998, certain subsidiaries of SunTrust
held in various fiduciary capacities an aggregate of 15,264,214 shares
(11.29%) of common stock of the Company. As to such shares, all of which
are held in various fiduciary capacities, SunTrust and certain of its
subsidiaries may be deemed beneficial owners; however, SunTrust and such
subsidiaries disclaim any beneficial interest in such shares. Shares
reported include shares also reported for the Maclellan family as well as
other shares held for owners unrelated to the Maclellan family.

SunTrust and its subsidiaries had the power to invest the following shares
of the Company's common stock:

Sole Investment Power.............................. 513,409 Shares-- 0.38%
Shared Investment Power............................ 14,750,805 Shares--10.91%
-------------------------
Total............................................ 15,264,214 Shares--11.29%

90

SunTrust and its subsidiaries had the power to vote the following shares of
the Company's common stock:

Sole Voting Power.................................... 1,585,246 Shares--1.17%
Shared Voting Power.................................. 106,887 Shares--0.08%
-----------------------
Total.............................................. 1,692,133 Shares--1.25%

As to the shares described above, SunTrust has informed the Company that as
of March 1, 1998, an aggregate of 15,494,367 shares (11.46%) of common
stock was held in various fiduciary capacities by SunTrust Bank,
Chattanooga, N.A. ("SunTrust"), which is a direct subsidiary of SunTrust
Bank of Tennessee, which is a direct subsidiary of SunTrust Banks, Inc.

As of March 1, 1999, SunTrust Bank, Chattanooga, N. A. had the power to
invest the following shares:

Sole Investment Power.............................. 438,153 Shares-- 0.33%
Shared Investment Power............................ 14,741,805 Shares--10.88%
-------------------------
Total............................................ 15,446,179 Shares--11.21%

As of March 1, 1999, SunTrust Bank, Chattanooga, N. A. had the power to
vote the following shares:

Sole Voting Power.................................... 1,421,129 Shares--1.05%
Shared Voting Power.................................. 106,569 Shares--0.08%
-----------------------
Total.............................................. 1,527,698 Shares--1.13%

With respect to the shares of common stock held by SunTrust Bank,
Chattanooga, N. A., the Company has been informed that (a) 6,696,181 shares
(4.94%) were owned by the Maclellan Foundation and the R. J. and Cora L.
Maclellan Trusts for the Maclellan Foundation; and (b) 7,739,487 shares
(5.71%) were owned by other trusts and charitable organizations within the
Maclellan family. Accordingly, an aggregate of 14,435,668 shares (10.65%)
were also included among those listed as beneficially owned by either the
R. J. and Cora L. Maclellan Trusts for the Maclellan Foundation, Kathrina
H. Maclellan, Hugh O. Maclellan, Jr., Robert H. Maclellan, Dudley Porter,
Jr., or Charlotte M. Heffner.

Item 13. Certain Relationships and Related Transactions

None.

91

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) List of Documents filed as part of this report

(1) Financial Statements

The following report and consolidated financial statements of
Provident Companies, Inc. and Subsidiaries, included in the
Registrant's Annual Report to Stockholders for the year ended December
31, 1998, are incorporated by reference in Item 8:

Report of Ernst and Young LLP, Independent Auditors

Consolidated Statements of Financial Condition at December 31,
1998 and 1997

Consolidated Statements of Income for the three years ended
December 31, 1998

Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1998

Consolidated Statements of Cash Flows for the three years ended
December 31, 1998

Notes to Consolidated Financial Statements

(2) Schedules Supporting Financial Statements

The following financial statement schedules of Provident Companies,
Inc. and Subsidiaries are included in Item 14(d):

Page
----

I. Summary of Investments--Other Than Investments in Related 96
Parties (Consolidated)......................................
II. Condensed Financial Information of Registrant............... 97
III. Supplementary Insurance Information (Consolidated).......... 101
IV. Reinsurance (Consolidated).................................. 103
V. Valuation and Qualifying Accounts (Consolidated)............ 104

Schedules not referred to have been omitted as inapplicable or
because they are not required by Regulation S-X.

(3) Exhibits

(2.1) Agreement and Plan of Share Exchange between Provident Companies, Inc.
and Provident Life and Accident Insurance Company of America
(incorporated by reference to Exhibit 2.1 of the Company's Form 10-K
filed for fiscal year ended 1995).

(2.2) Amended and Restated Agreement and Plan of Merger dated as of April 29,
1996 by and among Patriot Acquisition Corporation, The Paul Revere
Corporation and the Company (including exhibits thereto), (incorporated
by reference to Exhibit 2.1 of the Company's Form 10-Q and Form 10-Q/A
filed for fiscal quarter ended September 30, 1996).

(2.3) Agreement and Plan of Merger, dated as of November 22, 1998, between
UNUM Corporation and Provident Companies, Inc. incorporated by
reference to Exhibit 1 of the Company's Form 8-K filed November 24,
1998.
(3.1) Amended and Restated Certificate of Incorporation, (incorporated by
reference to Exhibit 3.1 of the Company's Form 10-K for fiscal year
ended 1995, as amended by Certificate of Amendment).

(3.2) Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of the Company's Form 10-Q filed for fiscal quarter
ended September 30, 1998).

(4.1) Form of Preferred Stock Certificate relating to the registration of
6,000,000 Depositary Shares each representing a one-sixth interest in a
share the 8.10% Cumulative Preferred Stock of America (incorporated by
reference to America's Registration Statement on Form S-3, Registration
No. 33-5612).

92

(4.2) Form of Depositary Agreement relating to the registration of 6,000,000
Depositary Shares each representing a one-sixth interest in a share the
8.10% Cumulative Preferred Stock of America (incorporated by reference
to America's Registration Statement on Form S-3, Registration No. 33-
5612).

(4.3) Form of Depositary Receipt relating to the registration of 6,000,000
Depositary Shares each representing a one-sixth interest in a share the
8.10% Cumulative Preferred Stock of America (incorporated by reference
to America's Registration Statement on Form S-3, Registration No. 33-
5612).

(4.4) Certificate of Amendment of Restated Charter relating to the
registration of 6,000,000 Depositary Shares each representing a one-
sixth interest in a share the 8.10% Cumulative Preferred Stock of
America (incorporated by reference to Exhibit 3.1 of America's Form 10-
K filed for the fiscal year ended December 31, 1992 and to America's
Registration Statement on Form S-3, Registration No. 33- 5612).

(4.5) Articles of Share Exchange (incorporated by reference to the Company's
Form 10-K filed for fiscal year ended 1995).

(10.1) Reinsurance and Administration Agreement by and between Transamerica
Occidental Life Insurance Company of Illinois and Accident dated March
18, 1987 (incorporated by reference to Exhibit 10.3 of Capital's
Registration Statement on Form S-1, Registration No. 33-17017).

(10.2) Tax Indemnification and Guaranty Agreement by and among Transamerica
Occidental, Transamerica Corporation and Accident dated March 18, 1987
(incorporated by reference to Exhibit 10.4 of Capital's Registration
Statement on Form S-1, Registration No. 33-17017).

(10.3) Asset and Stock Purchase Agreement by and between Healthsource and
America and its subsidiaries dated December 21, 1994. (incorporated by
reference to Exhibit 10.3 to America's Form 10-K filed for fiscal year
ended December 31, 1995).

(10.4) Annual Management Incentive Compensation Plan (MICP), adopted by
stockholders May 4, 1994 (incorporated by reference to Exhibit 10.5 to
America's Form 10-K filed for fiscal year ended December 31, 1994), and
amended by stockholders May 1, 1996 (incorporated by reference to
Exhibit 10.4 of Company's Form 10-K filed for fiscal year ended
December 31, 1996) and as amended by stockholders May 7, 1997
(incorporated by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders held May 7, 1997) and as Restated and
amended by stockholders May 6, 1998 (incorporated by reference to the
Company's Form 10-Q for fiscal quarter ended June 30, 1998).*

(10.5) Stock Option Plan, adopted by stockholders May 3, 1989, as amended by
the Compensation Committee on January 10, 1990, and October 29, 1991
incorporated by reference to Exhibit 10.6 to America's Form 10-K filed
for the fiscal year 1991); and as amended by the Compensation Committee
on March 17, 1992 and by the stockholders on May 6, 1992 (incorporated
by reference to registrant's Form 10-K filed for the fiscal year ended
December 31, 1992). Terminated effective December 31, 1993.*

(10.6) Accident and Subsidiaries Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.8 of Capital's Registration
Statement on Form S-1, Registration No. 33-17017).*

(10.7) Form of Surplus Note, dated December 1, 1996, in the amount of $150
million executed by Accident in favor of the Company (incorporated by
reference to Exhibit 10.7 of the Company's Form 10-K filed for the
fiscal year ended December 31, 1996).

(10.8) Reinsurance and Administration Agreement by and between Transamerica
Occidental and Accident dated March 18, 1987 (incorporated by reference
to Exhibit 10.15 to Capital's Registration Statement on Form S-1,
Registration No. 33-17017).

(10.9) Form of Severance Agreement offered to selected executive officers
(incorporated by reference to Exhibit 10.14 to Capital's Form 10-K
filed for fiscal year ended December 31, 1990), revised February 8,
1994 (incorporated by reference to Exhibit 10.14 to registrant's Form
10-K filed for fiscal year ended December 31, 1993).

93

(10.10) Description of Compensation Plan for Non-Employee Directors
(incorporated by reference to Amendment No. 1 to registrant's
Form 10-K filed January 27, 1993 on Form 8), and amended by the
Board of Directors on February 8, 1994 (incorporated by
reference to Exhibit 10.15 to America's Form 10-K filed for
fiscal year ended December 31, 1993).

(10.11) Stock Option Plan, originally adopted by stockholders May 5,
1993, as amended by stockholders on May 1, 1996 (incorporated by
reference to Exhibit 10.2 of Company's Form 10-Q for fiscal
quarter ended June 30, 1996) and as amended by stockholders on
May 7, 1997 (incorporated by reference to the Company's Proxy
Statement for the Annual Meeting of Stockholders held May 7,
1997).*

(10.12) Employment contract between America and J. Harold Chandler,
President and Chief Executive Officer, dated November 8, 1993
(incorporated by reference to Exhibit 10.17 to America's Form
10-K filed for fiscal year ended December 31, 1993).*

(10.13) Employee Stock Purchase Plan (of 1995) adopted by stockholders
June 13, 1995 (incorporated by reference to the Company's Form
10-K filed for fiscal year ended 1995).*

(10.14) Credit Agreement between the Company and a consortium of
financial institutions with The Chase Manhattan Bank as
Administrative Agent, relating to revolving loan in the
aggregate of $800 million maturing on July 30, 2001
(incorporated by reference to Exhibit 10.14 of the Company's
Form 10-K filed for fiscal year ended December 1996). Terminated
effective February 28, 1998.

(10.15) Amended and Restated common stock Purchase Agreement between
Provident Companies, Inc. and Zurich Insurance Company dated as
of May 31, 1996 (incorporated by reference to Exhibit 10.15 of
the Company's Form 10-K filed for fiscal year ended 1996).

(10.16) Amended and Restated Relationship Agreement between Provident
Companies, Inc. and Zurich Insurance Company dated as of May 31,
1996 (incorporated by reference to Exhibit 10.16 of the
Company's Form 10-K filed for fiscal year ended 1996).

(10.17) Amended and Restated Registration Rights Agreement between
Provident Companies, Inc. and Zurich Insurance Company dated as
of May 31, 1996 (incorporated by reference to Exhibit 10.17 of
the Company's Form 10-K filed for fiscal year ended 1996).

(10.18) Provident Companies, Inc. Stock Plan of 1999, adopted by
stockholders May 6, 1998 (incorporated by reference to the
Company's Form 10-Q for fiscal quarter ended June 30, 1998).*

(10.19) Provident Companies, Inc. Non-Employee Director Compensation
Plan of 1998, adopted by stockholders May 6, 1998 (incorporated
by reference to the Company's Form 10-Q for fiscal quarter ended
June 30, 1998).*

(10.20) Agreement between the Company and certain subsidiaries and
American General Corporation and certain subsidiaries dated as
of December 8, 1997 (incorporated by reference to Exhibit 3.2 of
the Company's Form 10-Q for the fiscal quarter ended September
30, 1998).
(10.21) Stock Option Agreement, dated as of November 22, 1998, by and
between Provident Companies, Inc. and UNUM Corporation, as
Grantee (incorporated by reference to Exhibits of the Company's
Form 8-K filed November 24, 1998).
(10.22) Stock Option Agreement, dated as of November 22, 1998, by and
between UNUM Corporation and Provident Companies, Inc., as
Grantee (incorporated by reference to Exhibits of the Company's
Form 8-K filed November 24, 1998).
(11) Statement re computation of per share earnings (incorporated
herein by reference to "Note 10 of the Notes to Consolidated
Financial Statements".

(21) Subsidiaries of the Company.

(23) Consent of Independent Auditors.

(24) Powers of Attorney.

(27) Financial Data Schedule.

- --------
* Management contract or compensatory plan required to be filed as an exhibit
to this form pursuant to Item 14(c) of Form 10-K.

94

The total amount of securities authorized pursuant to any instrument
defining rights of holders of long-term debt of the Company does not exceed
10% of the total assets of the Company and its consolidated subsidiaries. The
Company will furnish copies of any such instrument to the Commission upon
request.

(b) Reports on Form 8-K

A Form 8-K was filed by the registrant during the fourth quarter of 1998
announcing that the Company had entered into an Agreement and Plan of Merger
with UNUM.

(c) Exhibits

See "Item 14(a)(3)" above.

(d) Financial Statement Schedules

See "Item 14(a)(2)" above.

95

SCHEDULE I--SUMMARY OF INVESTMENTS--
OTHER THAN INVESTMENTS IN RELATED PARTIES

PROVIDENT COMPANIES, INC. AND SUBSIDIARIES

December 31, 1998

Amount at which
Fair shown in the Statement
Type of Investment Cost Value of Financial Position
------------------ --------- ---------- ----------------------
(in millions of dollars)

Available-for-Sale Fixed Maturity
Securities:
Bonds
United States Government and
Government Agencies and
Authorities................... $ 226.6 $ 298.9 $ 298.9
States, Municipalities, and
Political Subdivisions........ 14.8 16.1 16.1
Foreign Governments............ 526.4 676.3 676.3
Public Utilities............... 2,388.9 2,703.5 2,703.5
Mortgage-backed Securities..... 1,674.6 1,815.7 1,815.7
Convertible Bonds.............. 142.3 152.4 152.4
All Other Corporate Bonds...... 8,111.8 9,009.4 9,009.4
Redeemable Preferred Stocks...... 146.2 163.0 163.0
--------- ---------- ---------
Total........................ 13,231.6 $ 14,835.3 14,835.3
--------- ========== ---------
Held-to-Maturity Fixed Maturity
Securities:
Bonds
United States Government and
Government Agencies and
Authorities................... 13.5 $ 17.4 13.5
States, Municipalities, and
Political Subdivisions........ 2.4 2.6 2.4
Mortgage-backed Securities..... 276.1 311.5 276.1
All Other Corporate Bonds...... 15.0 21.0 15.0
--------- ---------- ---------
Total........................ 307.0 $ 352.5 307.0
--------- ========== ---------
Equity Securities:
Common Stocks.................... 1.5 $ 1.0 1.0
Nonredeemable Preferred Stocks... 1.2 1.1 1.1
--------- ---------- ---------
Total........................ 2.7 $ 2.1 2.1
--------- ========== ---------
Mortgage Loans..................... 17.8 17.8
Investment Real Estate............. 78.0 43.6*
Policy Loans....................... 2,089.6 2,089.6
Other Long-term Investments........ 8.4 8.4
Short-term Investments............. 28.9 28.9
--------- ---------
$15,764.0 $17,332.7
========= =========

- --------
* Difference between cost and carrying value results from certain valuation
allowances and other temporary declines in value.

96

SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

PROVIDENT COMPANIES, INC. (Parent Company)

STATEMENTS OF FINANCIAL CONDITION

December 31
--------------------------
1998 1997
------------ ------------
(in millions of dollars)

ASSETS
Fixed Maturity Securities
Available-for-Sale--at fair value (amortized
cost: $9.6; $9.6)............................... $ 11.4 $ 10.8
Short-term Investments............................. -- 13.3
Investment in Subsidiaries......................... 4,065.3 3,720.0
Short-term Notes Receivable from Subsidiaries...... 16.1 36.6
Surplus Notes of Subsidiaries...................... 250.0 250.0
Other Assets....................................... 133.5 36.9
------------ ------------
Total Assets................................... $ 4,476.3 $ 4,067.6
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term Debt from Subsidiaries................ $ 32.4 $ 24.7
Long-term Debt................................... 600.0 725.0
Other Liabilities................................ 135.4 38.6
------------ ------------
Total Liabilities.............................. 767.8 788.3
------------ ------------
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debt Securities of the
Company........................................... 300.0 --
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stock.................................. -- 156.2
Common Stock..................................... 135.7 135.2
Additional Paid-in Capital....................... 762.0 750.6
Accumulated Other Comprehensive Income........... 685.7 603.6
Retained Earnings................................ 1,834.3 1,635.2
Treasury Stock................................... (9.2) (1.5)
------------ ------------
Total Stockholders' Equity..................... 3,408.5 3,279.3
------------ ------------
Total Liabilities and Stockholders' Equity..... $ 4,476.3 $ 4,067.6
============ ============

See notes to condensed financial information.

97

SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(Continued)

PROVIDENT COMPANIES, INC. (Parent Company)

STATEMENTS OF NET INCOME

Year Ended December 31
---------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

Dividends from Subsidiaries....................... $ 77.9 $ 109.9 $ 52.6
Interest from Subsidiaries........................ 21.3 17.1 12.3
Other Income...................................... 10.4 1.3 1.7
-------- -------- --------
Total Revenue................................... 109.6 128.3 66.6
-------- -------- --------
Interest and Debt Expense ........................ 62.7 38.7 10.2
Other Expenses.................................... 2.6 4.3 1.2
-------- -------- --------
Total Expenses.................................. 65.3 43.0 11.4
-------- -------- --------
Income Before Federal Income Taxes and Equity in
Undistributed Earnings of Subsidiaries........... 44.3 85.3 55.2
Federal Income Taxes (Credit)..................... 8.1 (7.3) 1.1
-------- -------- --------
Income Before Equity in Undistributed Earnings of
Subsidiaries..................................... 36.2 92.6 54.1
Equity in Undistributed Earnings of Subsidiaries.. 217.8 154.7 91.5
-------- -------- --------
Net Income........................................ $ 254.0 $ 247.3 $ 145.6
======== ======== ========

See notes to condensed financial information.

98

SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(Continued)

PROVIDENT COMPANIES, INC. (Parent Company)

STATEMENTS OF CASH FLOWS

Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

CASH PROVIDED BY OPERATING ACTIVITIES............ $ 11.6 $ 105.8 $ 69.7
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (Purchases) Sales of Short-term Invest-
ments......................................... 13.3 108.2 (120.8)
Acquisition of Business........................ -- (860.3) --
Cash Distribution (to) from Subsidiaries....... 13.3 (5.0) 100.0
Short-term Notes Receivable from Subsidiaries.. 20.5 (29.5) --
Surplus Notes Issued to Subsidiaries........... -- (100.0) (3.0)
Other.......................................... (24.2) (0.1) (2.5)
-------- -------- --------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES..... 22.9 (886.7) (26.3)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Short-term Borrowings from Subsidiaries.... 7.7 24.7 --
Issuance of Long-term Debt..................... 600.0 725.0 200.0
Long-term Debt Repayments...................... (725.0) (299.1) (200.0)
Issuance of Company-Obligated Mandatorily Re-
deemable Preferred Securities................. 300.0 -- --
Redemption of Preferred Stock.................. (156.2) -- --
Issuance of Common Stock....................... 11.9 389.8 5.8
Dividends Paid to Stockholders................. (58.1) (60.0) (45.5)
Other.......................................... (14.3) 0.5 (3.6)
-------- -------- --------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES..... (34.0) 780.9 (43.3)
-------- -------- --------
INCREASE IN CASH................................. $ 0.5 $ -- $ 0.1
======== ======== ========

See notes to condensed financial information.

99

SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(Continued)

PROVIDENT COMPANIES, INC. (Parent Company)

NOTES TO CONDENSED FINANCIAL INFORMATION

Note 1--Basis of Presentation

The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
Provident Companies, Inc. and Subsidiaries.

Note 2--Surplus Notes of Subsidiaries

At December 31, 1998 and 1997, the Company held from its insurance
subsidiaries a $150.0 million surplus debenture due in 2006, and a $100.0
million surplus debenture due in 2027. Semi-annual interest payments are
conditional upon the approval by the insurance departments of the
subsidiaries' state of domicile. The weighted average interest rate for
surplus notes of subsidiaries was 8.1%, 7.1%, and 9.5% in 1998, 1997, and
1996, respectively.

100

SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION

PROVIDENT COMPANIES, INC. AND SUBSIDIARIES

Deferred Future Policy Other Policy
Policy Benefits, Losses, Claims and
Acquisition Claims, and Unearned Benefits Premium
Segment Costs Loss Expenses Premiums Payable Revenue
------- ----------- ----------------- -------- ------------ --------
(in millions of dollars)

Year Ended December 31,
1998
Individual.............. $385.5 $ 8,805.1 $184.2 $312.0 $1,474.4
Employee Benefits....... 12.9 1,002.2 2.2 156.7 710.6
Voluntary Benefits...... 66.4 371.7 0.3 11.5 84.2
Other................... -- 3,463.5 -- 33.6 78.2
------ --------- ------ ------ --------
Total................. $464.8 $13,642.5 $186.7 $513.8 $2,347.4
====== ========= ====== ====== ========
Year Ended December 31,
1997(1)
Individual.............. $290.1 $ 8,351.3 $186.4 $299.0 $1,286.6
Employee Benefits....... 4.3 940.9 1.9 120.9 552.3
Voluntary Benefits...... 53.5 348.8 0.3 10.5 79.3
Other................... 15.0 3,360.1 4.1 100.8 135.5
------ --------- ------ ------ --------
Total................. $362.9 $13,001.1 $192.7 $531.2 $2,053.7
====== ========= ====== ====== ========
Year Ended December 31,
1996(1)
Individual.............. $367.0 $ 4,229.5 $ 52.5 $178.8 $ 646.1
Employee Benefits....... 6.5 450.3 1.3 108.7 325.8
Voluntary Benefits...... 37.9 324.1 0.3 9.4 70.6
Other................... 10.4 3,047.4 4.7 114.8 133.2
------ --------- ------ ------ --------
Total................. $421.8 $ 8,051.3 $ 58.8 $411.7 $1,175.7
====== ========= ====== ====== ========

- --------
(1) Information for 1997 and 1996 has been reclassified to conform to the 1998
presentation.

101

SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION--(Continued)

PROVIDENT COMPANIES, INC. AND SUBSIDIARIES

Benefits, Amortization
Claims, of Deferred
Net Losses and Policy Other
Investment Settlement Acquisition Operating Premiums
Segment Income(2) Expenses Costs Expenses(3) Written
------- ---------- ---------- ------------ ----------- --------
(in millions of dollars)

Year Ended December 31,
1998
Individual.............. $ 736.0 $1,461.2 $66.5 $490.9 $1,398.3
Employee Benefits....... 123.2 605.9 3.6 236.7 392.6
Voluntary Benefits...... 27.1 61.6 9.8 21.8 14.8
Other................... 460.8 448.5 -- 40.0 40.0
Corporate............... 26.9 -- -- 88.7 --
-------- -------- ----- ------
Total................. $1,374.0 $2,577.2 $79.9 $878.1
======== ======== ===== ======
Year Ended December 31,
1997(1)
Individual.............. $ 589.8 $1,196.9 $62.8 $410.3 $1,207.9
Employee Benefits....... 101.5 480.6 2.1 207.8 275.3
Voluntary Benefits...... 25.2 63.3 7.1 23.0 15.0
Other................... 617.6 617.3 2.4 62.1 54.0
Corporate............... 20.6 -- -- 37.2 --
-------- -------- ----- ------
Total................. $1,354.7 $2,358.1 $74.4 $740.4
======== ======== ===== ======
Year Ended December 31,
1996(1)
Individual.............. $ 371.8 $ 680.9 $54.2 $174.5 $ 581.9
Employee Benefits....... 66.7 299.8 2.7 62.2 110.9
Voluntary Benefits...... 23.3 58.4 5.7 18.6 15.4
Other................... 606.5 622.1 1.4 56.3 115.1
Corporate............... 21.8 -- -- 28.9 --
-------- -------- ----- ------
Total................. $1,090.1 $1,661.2 $64.0 $340.5
======== ======== ===== ======

- --------
(1) Information for 1997 and 1996 has been reclassified to conform to the 1998
presentation.
(2) Net investment income is allocated based upon segmentation. In other
words, as cash flow from operations and assigned capital is generated by a
segment, the cash is invested in assets with the appropriate
characteristics for that segment's liabilities and operating structure.
Thus, each segment has its own specifically identified assets and receives
the investment income generated by those assets.
(3) Other operating expenses are allocated to each segment based on activity
levels, time information, and usage statistics.

102

SCHEDULE IV--REINSURANCE

PROVIDENT COMPANIES, INC. AND SUBSIDIARIES

Percentage
Ceded Assumed Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
---------- --------- ---------- ---------- ----------
(in millions of dollars)

Year Ended December 31,
1998
Life Insurance in Force.. $157,919.8 $5,480.0 $397.2 $152,837.0 0.3%
========== ======== ====== ==========
Premium Income:
Life Insurance......... $ 528.6 $ 28.3 $ 2.3 $ 502.6 0.5%
Accident and Health
Insurance............. 1,744.6 101.9 202.1 1,844.8 11.0%
---------- -------- ------ ----------
Total................ $ 2,273.2 $ 130.2 $204.4 $ 2,347.4 8.7%
========== ======== ====== ==========
Year Ended December 31,
1997(1)
Life Insurance in Force.. $137,924.6 $6,184.7 $416.2 $132,156.1 0.3%
========== ======== ====== ==========
Premium Income:
Life Insurance......... $ 469.6 $ 26.3 $ 1.2 $ 444.5 0.3%
Accident and Health
Insurance............. 1,680.1 244.1 173.2 1,609.2 10.8%
---------- -------- ------ ----------
Total................ $ 2,149.7 $ 270.4 $174.4 $ 2,053.7 8.5%
========== ======== ====== ==========
Year Ended December 31,
1996(1)
Life Insurance in Force.. $102,227.5 $4,347.9 $437.0 $ 98,316.6 0.4%
========== ======== ====== ==========
Premium Income:
Life Insurance......... $ 369.5 $ 21.3 $ 1.1 $ 349.3 0.3%
Accident and Health
Insurance............. 1,060.2 284.2 50.4 826.4 6.1%
---------- -------- ------ ----------
Total................ $ 1,429.7 $ 305.5 $ 51.5 $ 1,175.7 4.4%
========== ======== ====== ==========

- --------
(1) Information for 1997 and 1996 has been reclassified to conform to the 1998
presentation.

103

SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS

PROVIDENT COMPANIES, INC. AND SUBSIDIARIES

Additions Deductions for
Balance Charged Additions Amounts Applied Balance
at to Costs Charged to Specific Loan at End
Beginning and to Other at Time of of
Description of Period Expenses Accounts Sale/Foreclosure Period
----------- --------- --------- --------- ---------------- -------
(in millions of dollars)

Year Ended December 31,
1998
Mortgage loan loss
reserve................ $ 1.0 $ -- $ -- $ 1.0 $ --
Real estate reserve(1).. $22.9 $11.5 $ -- $ -- $34.4
Allowance for doubtful
accounts (deducted from
accounts and premiums
receivable)............ $ 2.7 $ 0.2 $ -- $ -- $ 2.9

Year Ended December 31,
1997
Mortgage loan loss
reserve................ $ 1.0 $ -- $ -- $ -- $ 1.0
Real estate reserve(1).. $21.5 $ 7.6 $ -- $ 6.2 $22.9
Allowance for doubtful
accounts (deducted from
accounts and premiums
receivable)(2)......... $ 1.2 $ 0.5 $1.0 $ -- $ 2.7

Year Ended December 31,
1996
Mortgage loan loss
reserve................ $12.0 $ -- $ -- $11.0 $ 1.0
Real estate reserve(1).. $19.1 $ 2.4 $ -- $ -- $21.5
Allowance for doubtful
accounts (deducted from
accounts and premiums
receivable)............ $ 0.8 $ 0.4 $ -- $ -- $ 1.2

- --------
(1) Amounts shown in additions charged to cost and expenses represent realized
investment losses.
(2) Amounts shown in additions charged to other accounts represent reserves
related to acquired business.

104

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

Date: March 31, 1999

PROVIDENT COMPANIES, INC.
(Registrant)

/s/ J. Harold Chandler
By: _________________________________
J. Harold Chandler
Chairman, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 31, 1999.

/s/ J. Harold Chandler
________________________________
J. Harold Chandler
Chairman, President and
Chief Executive Officer and a
Director
(Principal Executive Officer)

/s/ Thomas R. Watjen /s/ Ralph A. Rogers, Jr.
________________________________ ________________________________
Thomas R. Watjen Ralph A. Rogers, Jr.
Vice Chairman, and Chief Senior Vice President and
Financial Officer and a Director Treasurer

Signature Title
--------- -----

* Director
______________________________________
William L. Armstrong

* Director
______________________________________
William H. Bolinder

* Director
______________________________________
Charlotte M. Heffner

* Director
______________________________________
Hugh B. Jacks

105

Signature Title
--------- -----

* Director
______________________________________
Hugh O. Maclellan, Jr.

* Director
______________________________________
A.S. Macmillan

* Director
______________________________________
C. William Pollard

* Director
______________________________________
Scott L. Probasco, Jr.

* Director
______________________________________
Steven S Reinemund

* Director
______________________________________
Burton E. Sorensen

/s/ Susan N. Roth For all of the Directors
*By: _________________________________
Susan N. Roth
Attorney-in-Fact

106

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

EXHIBITS

to

FORM 10-K

PROVIDENT COMPANIES, INC.

INDEX OF EXHIBITS

Exhibit
------- ---

(21) Subsidiaries of the Company
(23) Consent of Independent Auditors
(24) Powers of Attorney
(27) Financial Data Schedule

All other Exhibits are incorporated by reference as explained in the list in

Item 14(a)(3).